Houseman - Corporate Law - 71UTorontoFacLRev28

Citation: 71 U. Toronto Fac. L. Rev.
28 2013
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ADVANCE NOTICE PROVISIONS:
OPPRESSION AND THE PUBLIC INTEREST*
GORDON T HOUSEMAN**
ABSTRACT 29
I INTRODUCTION 30
II SHAREHOLDERS, DIRECTORS, AND THE CORPORATION 32
Shareholder Voting Power 32
Legal Strategy to Replace Directors and the Element of Surprise 35
III ADVANCE NOTICE PROVISIONS 37
The Mechanisms to Implement Advance Notice Provisions 38
The Advantages of Advance Notice 39
The Disadvantages of Advance Notice 40
IV ADVANCE NOTICE PROVISIONS IN PRACTICE 42
Mundoro 43
Maudore 47
V PROBLEMATIC USE AND DRAFTING OF ADVANCE NOTICE PROVISIONS 50
Timing and Manner of Adoption 51
Preventing Nominations Before a Specific Date 52
VI BCE AND ADVANCE NOTICE PROVISIONS 55
Reasonable Expectations 56
Oppression, Unfair Prejudice, or Unfair Disregard 61
VII THE PUBLIC INTEREST POWER 64
The Nature and Scope of Public Interest Power 64
The Tension Between Corporate and Securities Law 66
The Public Interest Power and Problematic Uses of
Advance Notice Provisions 69
VIII CONCLUSION 74
* The author is grateful to Christopher Bamford for his invaluable review and criticism and Charles
McDonald for introducing him to Northern Mineral Investment Corp v Mundoro Capital Inc. The
author also acknowledges the valuable assistance of the editors of the University of Toronto Faculty of
Law Review. Most importantly, the author thanks Lauren for her unending patience and support. All
opinions, errors, and omissions are the author's own.
** B.A. (Hons.) (Queen's), J.D. (Toronto), Associate (Shearman & Sterling LLP)
ADVANCE NOTICE PROVISIONS
ABSTRACT
Advance notice provisions require shareholders to provide notice of director nomin-
ations to incumbent management in advance of annual and special meetings. In
doing so, advance notice provisions prevent a dissident from "hiding in the weeds"
to take advantage of a poorly attended meeting to elect the nominees of his or
her choice. In Northern Minerals Investment Corp v Mundoro Capital Inc and
Maudore Minerals Ltd v Harbour Foundation, incumbent directors'use of advance
notice provisions was upheld under corporate law. Although neither decision found
that the advance notice provision in question violated corporate law, there is still a
risk that incumbent corporate directors may use an advance notice provision in a
manner that violates corporate or securities law. In particular, the provision and its
manner of adoption may violate the oppression remedy found in section 241 of the
Canada Business Corporations Act as interpreted by the Supreme Court of Canada
in BCE Inc v 1976 Debentureholders. Further, directors' use of an advance notice
provision may be contrary to the public interest as protected by provincial securities
regulators.
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2013 29
UNIVERSITY OF TORONTO FACULTY OF LAW REVIEW
I INTRODUCTION
Advance notice provisions' require shareholders to give a company notice of direc-
tor nominations and detailed information about nominees in advance of an annual
or special meeting.
2
They can take the form of a policy adopted by the board of
directors or an amendment to corporate by-laws or articles of incorporation. If a
dissident shareholder fails to comply with the advance notice provision, the direc-
tors can refuse the shareholder's nominations.
4
Advance notice provisions can foster shareholder democracy by "allowing
shareholders to fully participate in the director election process in an informed
and effective manner", and can prevent a dissident from "[hiding] in the weeds"
6
to take advantage of a poorly attended meeting to elect the nominees of his or her
choice. Arguably, however, directors can draft or implement an advance notice
provision in a manner that is detrimental to the interests of shareholders. This
article will argue that advance notice provisions have the potential to violate both
corporate and securities law.
7
Part II considers shareholders' statutory ability to vote on the corporation's
directors and other important corporate matters. Further, Part II discusses the
statutory mechanisms that shareholders can use to replace existing directors. Part
III considers the mechanisms that directors can use to implement advance notice
1 To avoid confusion between the terms "advance notice provision" and "board policy", the author
has used the term "board policy" to refer to any policy adopted by the board, including an advance
notice policy, and "advance notice provision" to refer to any advance notice policy adopted by way of
board policy or by-law or article amendment.
2 Dennis H Peterson & Matthew J Cumming, Shareholder Remedies in Canada, loose-leaf (consulted
on 15 January 2013), 2d ed (Markham: LexisNexis Canada, 2009), ch 13 at 16.
3 For the purpose of this article, "dissident shareholder" refers to a shareholder who proposes nomi-
nees to replace the existing directors.
4 See Mundoro Capital Inc, "Advance Notice Policy" (9 June 2012), online: System for Electronic
Document Analysis and Retrieval (SEDAR) <www.sedar.com>, filed as "Material document - Eng-
lish", Mundoro Capital Inc (11 June 2012) [Mundoro ANP]; Maudore Minerals Ltd, "By-Law No
1" (24 May 2012), online: System for Electronic Document Analysis and Retrieval (SEDAR) <www.
sedar.com>, filed as "Security holders documents - English", Maudore Minerals Ltd (25 May 2012)
[Maudore ANP].
5 Institutional Shareholder Services Inc, "2013 Canadian Proxy Voting Guidelines (TSX-Listed Com-
panies)" (19 December 2012) at 15, online: Institutional Shareholder Services (ISS) <http://www.
issgovernance.com>.
6 Northern Minerals Investment Corp v Mundoro Capital Inc, 2012 BCSC 1090 at para 54, 36 BCLR
(5th) 408 [Mundoro].
7 Because US corporate and securities law does not have an equivalent to the oppression remedy or
the public interest power, this article does not consider US jurisprudence. For US jurisprudence, see
Openwave Systems Inc v Harbinger Capital Partners Master Fund I Ltd, 924 A 2d 228 (Del Ch 2007);
JANA Master Fund Ltd v CNET Networks Inc, 954 A 2d 335 (Del Ch 2008), affd 947 A 2d 1120
(Del 2008) (the issues in this case would not arise in Canada as US securities law requires manage-
ment to send their proxy in advance of the window of opportunity commonly being used in Canadian
corporations); Levitt Corp v Office Depot Inc, CA No 3622-VCN (Del Ch 2008) (the issue in this case
would not arise under the advance notice provisions commonly used in Canada because the Canadian
advance notice provisions restrict the nomination of directors but not the business conducted at the
meeting).
VOL 71 2) 30
provisions, and discusses the advantages and disadvantages of the provisions to
shareholders and directors.
Part IV discusses two recent court decisions that have upheld incumbent direc-
tors' use of advance notice provisions under corporate law: Northern Minerals
Investment Corp v Mundoro Capital Inc' and Maudore Minerals Ltd v Harbour
Foundation.
9
In particular, Part IV sets out the background of the disputes, the
decision of each Court, and the events that followed each decision.
While advance notice provisions can be beneficial to shareholder democracy,
directors may use advance notice provisions in a manner that harms the interests
of shareholders. Part V suggests that advance notice provisions can have a dele-
terious effect on shareholders under several circumstances. For instance, directors
may draft and implement advance notice provisions in a manner that effectively
precludes shareholders from nominating directors at a meeting, or in a manner that
reduces the chance that shareholders will elect a dissident shareholder's nominee.
Where an advance notice provision harms shareholders, the provision may be
contrary to both corporate and securities law. Part VI argues that, although the
Courts in Mundoro and Maudore did not strike down the advance notice provisions
implemented by the directors, in the future, courts might invalidate such provisions
when they are used by directors in a way that breaches the reasonable expectations
of a dissident share-holder in a manner that is oppressive or unfairly prejudicial
to his or her interests. In particular, when directors implement the provision after
the last day on which the provision permits nominations ("cut-off date"), or when
directors implement the provision close to the cut-off date and take steps to stall
the announcement of the nomination, the directors' use of the advance notice
provision may be oppressive and contrary to section 241 of the Canada Business
Corporations Acto as interpreted by the Supreme Court of Canada in BCE Inc v
1976 Debentureholders.
1
Further, where a provision prohibits nominations prior
to a specific date without reason, courts may apply the oppression remedy to elim-
inate the restriction.
In addition, the directors' use of an advance notice provision may be contrary
to securities law. Securities legislation gives securities regulators the power to
intervene when directors' actions are contrary to the public interest.
12
Part VII will
argue that, in light of the increased use of advance notice provisions by Canadian
8 Supra note 6.
9 2012 ONSC 4255, 111 OR (3d) 660 [Maudore].
10 RSC 1985, c C-44, s 241 [CBCA]. This article focuses mainly on the CBCA because many large cor-
porations are established under this statute, and it shares many common features with other provincial
statutes such as the Ontario Business Corporations Act, RSO 1990, c B.16 [OBCA] and the Alberta
Business Corporations Act, RSA 2000, c B-9 [ABCA]. This article also discusses the British Columbia
Business Corporations Act, SBC 2002, c 57 [BCBCA] because of its unique feature of lacking director
implemented by-laws but allowing director implemented board policies.
11 2008 SCC 69, [2008] 3 SCR 560 [BCE].
12 See e.g., Securities Act, RSO 1990, c S.5, s 127 [OSA]; Securities Act, RSBC 1996, c 418, s 161
[BCSA]; Securities Act, RSA 2000, c S-4, ss 197-98.
SPRING
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corporations, securities regulators should critically examine advance notice
provisions, and do so on a case-by-case basis to determine whether an advance
notice provision is contrary to the public interest. In particular, an advance notice
provision may be abusive of shareholders and capital markets where the provision
is used to either entrench management or constrain the fundamental rights of
shareholders. Consequently, if left unchecked, the damage to shareholder democ-
racy may lead to inefficient markets and a decline in investors' confidence in
Canadian capital markets.
II SHAREHOLDERS, DIRECTORS, AND THE CORPORATION
Advance notice provisions have the potential to affect how shareholders exercise
their right to vote and nominate directors. Therefore, before considering advance
notice provisions, this article will examine some of the statutory mechanisms that
give shareholders the ability to vote for directors and on other corporate matters,
and to propose new corporate directors.
. SHAREHOLDER VOTING POWER
Canadian corporate law provides shareholders with the right to change the board
of directors and to amend the corporation's constating documents. This subsec-
tion of the article will consider shareholders' statutory right to determine the
corporation's directors, and the effect of this right on directors' incentives to act
in the best interests of the corporation. In addition, this subsection will consider
shareholders' rights to control the terms of the "corporate contract" that governs
the relationship between the directors, the shareholders, and the corporation.
(i) Changing the Board of Directors
Generally, a corporation has the capacity, rights, powers, and privileges of a
natural person.1
4
However, because a corporation is an artificial, juristic entity,
individuals must act on behalf of the corporation. By default, corporate law confers
this responsibility on directors. Specifically, subject to a unanimous shareholder
agreement,
16
the CBCA requires the directors to manage, or supervise the manage-
ment of, the business and affairs of the corporation." In addition, directors can
13 See e.g., Peterson & Cumming, supra note 2.
14 CBCA, supra note 10, s 15(1).
15 See e.g., Kevin McGuinness, Halsbury's Laws of Canada: Business Corporations (2013 Reissue), 1st
ed (Markham: LexisNexis Canada, 2013), HBC-1.
17 Ibid, s 102(1).
VOL 71 2) 32
appoint officers, and can delegate certain powers to the officers to allow them to
manage the business and affairs of the corporation.
Although the directors and officers manage the corporation, they are not the
residual claimants of the corporation's assets. Section 24 of the CBCA provides
that where a corporation has one class of shares, holders of those shares must
have the right to vote at shareholder meetings, to receive dividends, and to receive
the remaining property of the corporation on dissolution.
19
Further, section 106
of the CBCA explicitly bestows on shareholders the power to elect the directors.
20
From a corporate governance perspective, sections 24 and 106 of the CBCA can
be thought of as providing shareholders with democratic rights and a financial
interest in the corporation.
In short, the CBCA provides that directors manage the corporation and share-
holders elect those directors. In giving directors and shareholders these distinct
rights, the CBCA creates a separation of ownership and control.
21
As discussed by
Adolf Berle & Gardiner Means in their seminal work, The Modern Corporation
and Private Property,
22
directors and officers motivated by personal interests may
not act in a manner that maximizes corporate value.
23
The divergent interests of
management and shareholders can lead to agency costs, which consist of the costs
that the principal and agent incur to ensure that the agent acts in the principal's
best interests, as well as the costs of any residual divergence between the agent's
decisions and the decisions that are in the best interests of the principal.
24
Thus,
shareholders may incur costs where the actions of management do not align with
the best interests of the corporation, and where the shareholders must take steps
to minimize such misalignment.
However, corporate law and market mechanisms can control these divergent
interests and agency costs.
25
Shareholders can minimize agency costs and maxi-
mize firm value by using their statutory right to replace directors-the ability of
shareholders to replace directors should incentivize the directors to act in the best
interests of the corporation. In other words, shareholders' right to replace direc-
tors is "intended to render the directors accountable to shareholders".
26
18 Ibid, s 121(a).
19 Ibid, s 24(3).
20 Ibid, s 106(3).
21 See generally Adolf A Berle, Jr & Gardiner C Means, The Modern Corporation and Private Property
(New York: MacMillan, 1933).
22 Ibid.
23 Ibid at 122.
24 Michael C Jensen & William H Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs
and Ownership Structure" (1976) 3:4 Journal of Financial Economics 305 at 308.
25 Poonam Puri et al, Cases, Materials and Notes on Partnerships and Canadian Business Corporations,
5th ed (Toronto: Carswell, 2011) at 189.
26 J Anthony VanDuzer, The Law of Partnerships & Corporations, 3d ed (Toronto: Irwin Law, 2009)
at 254.
SPRING
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Although the ability to change the board of directors can independently influ-
ence the directors to act in the best interests of the corporation, the ability of share-
holders to replace directors bolsters other market mechanisms that control agency
costs. For example, the "market for corporate control"
27
relies on the ability of
shareholders to determine the board of directors.
28
The market for corporate
control operates by incentivizing an investor to acquire control of a mismanaged
corporation and replace existing management,
29
because the share price of a
mismanaged corporation should increase when new directors replace inefficient
directors.o This financial incentive is dependent on the shareholder's ability to
replace existing management. Without the ability to replace inefficient manage-
ment, the investor cannot expect the value of his or her investment to increase.
(ii) Changing the "Corporate Contract"
In addition to replacing directors, shareholders can use their voting power to
change the corporation's constating documents.
1
A CBCA corporation's constat-
ing documents include the articles of incorporation and the corporate by-laws.
3 2
The constating documents establish the rights of directors, shareholders, or the
corporation. The constating documents illustrate the contractarian conception of
corporate law, which suggests that the corporation is a nexus of various contractual
relationships between numerous parties, such as shareholders and managers.
From this perspective, corporate statutes should essentially set out a standard-
ized contract that strives to give shareholders and management the terms that
both parties would desire absent statutory involvement.
34
Shareholders benefit
from standardized terms because standardized terms reduce the transaction costs
of negotiating the "corporate contract".
35
In addition, corporate statutes should
enable contracting by providing shareholders with the ability to alter, or contract
around, standard terms.
3 6
For example, section 103 of the CBCA provides direc-
tors with the ability to make, amend, or repeal any by-laws that regulate the busi-
ness or affairs of the corporation; however, the articles, by-laws, or a unanimous
27 Henry G Manne, "Mergers and the Market for Corporate Control" (1965) 73:2 Journal of Political
Economy 110 at 112-13.
28 Puri, supra note 25 at 195.
29 Ibid.
30 Manne, supra note 27 at 113.
31 See e.g., CBCA, supra note 10, ss 103(4), 175.
32 Duha Printers (Western) Ltd v Canada, [1998] 1 SCR 795 at para 58, 159 DLR (4th) 457.
33 Puri, supra note 25 at 187.
34 Ibid at 197.
35 Ibid at 196.
36 Ibid at 197.
VOL 71 2)
34
shareholder agreement can remove the directors' ability to change these by-laws.
The ability of directors and shareholders to make by-laws that govern the corpora-
tion illustrates the theory of the "corporate contract". Because the CBCA is silent
on most governance issues, the CBCA permits shareholders and directors to deter-
mine many of the rules that govern each corporation."
II. LEGAL STRATEGY TO REPLACE DIRECTORS AND THE ELEMENT OF SURPRISE
As discussed, the ability of shareholders to determine the corporation's directors is
a basic right that allows shareholders to ensure that the directors are acting in the
best interests of the corporation. In addition to their right to elect directors, share-
holders can nominate directors.
3 9
The method by which shareholders nominate a
director depends on whether the nomination takes place in the context of a share-
holder-requisitioned meeting or a director-called meeting. Each type of meeting
will be addressed separately below.
(i) Strategies to Replace Directors Under a Meeting Called by the Corporation
Director-called meetings provide shareholders with the opportunity to nominate
their own directors through a shareholder proposal, shareholder ambush, or proxy
fight.
(a) A Dissident May Submit a Shareholder Proposal Nominating New Directors
According to section 137 of the CBCA, a registered or beneficial shareholder can
submit a proposal for all shareholders to consider at a meeting.
40
This power
provides shareholders with the ability to nominate alternative directors for elec-
tion, provided the dissident or group of dissidents hold at least five percent of the
outstanding shares of a class of shares of the corporation.
41
(b) A Dissident May Announce a Nomination at the Meeting
Where the dissident or a group of dissidents holds a sufficiently large proportion
of shares, a shareholder ambush can be an effective strategy to replace existing
directors. A shareholder ambush occurs when a dissident nominates directors at
38 Directors can generally impose by-laws with immediate effect. Shareholders can propose by-laws
and reject by-laws adopted by the directors.
39 See e.g., CBCA, supra note 10, s 137(4).
40 Ibid, s 137.
41 Ibid, s 137(4).
SPRING
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35
the meeting without any warning, relying on the tactical advantage of surprise.
4 2
A
shareholder ambush is not an uncommon occurrence in Canada.
43
(c) A Dissident May Solicit Proxies
A dissident may also engage the existing management in a proxy battle. A proxy is
a form that permits a shareholder to give another person the power to vote his or
her shares.
44
Shareholders may decide to send their proxy form to management to
enable management to vote for their own nominees on the shareholder's behalf.
However, where a dissident proposes nominees, the dissident may solicit share-
holders' proxies in accordance with section 150 of the CBCA
45
and Part 7 of the
CBCA Regulations,
4 6
so that the dissident can vote the proxies in favour of his or
her own nominees.
4 7
Proxy solicitation rules generally require dissidents to send
a proxy circular in prescribed form stating the purposes of the solicitation "to the
auditor of the corporation, to each shareholder whose proxy is solicited, to each
director and ...to the corporation".
48
Proxy solicitation is usually more costly than
a shareholder proposal, because unlike a proposal, the dissident bears the cost of
proxy solicitation.
4 9
The CBCA provides two exemptions to shareholders from the obligation to
comply with section 150(1). First, if the dissident solicits proxies from 15 or fewer
shareholders, with two or more joint holders counting as one, then the dissident
need not send a proxy circular as otherwise required by section 150(1) to the
corporation and its directors.
0
A dissident shareholder planning an ambush can
benefit from this exemption. According to the CBCA, directors have the right to
set a record date for the purpose of determining which shareholders are entitled
to vote at a shareholder meeting." If shareholders acquire a voting share after the
record date, they will be ineligible to vote at the forthcoming meeting. Effectively,
the record date prevents shareholders from acquiring and voting a large number
42 See e.g., Peterson & Cumming, supra note 2.
43 Ibid.
44 See e.g., CBCA, supra note 10, ss 24, 147 "form of proxy", "proxy" (section 24 of the CBCA enables
shareholders to vote at any shareholder meeting, and section 147 specifies that a proxyholder can at-
tend and act on the shareholder's behalf at a shareholder meeting).
45 CBCA, supra note 10, s 150.
46 Canada Business Corporations Regulations, 2001, SOR/2001-512 [Regulations].
47 Regardless of whether there are other nominations, management must send a form of proxy to
shareholders in accordance with section 149(1) of the CBCA, supra note 10, subject to section 149(2).
48 Ibid, s 150(1).
49 See e.g., Peterson & Cummings, supra note 2.
50 CBCA, supra note 10, s 150(1.1). On its face, this exemption would appear to be a logical fit with
a shareholder ambush; however, securities law will require disclosure where the shareholders' aggre-
gate voting power is 10% or more: see e.g., OSA, supra note 12, s 102.1(1).
51 CBCA, supra note 10, s 134(1)(d).
VOL 71 2)
36
of shares immediately before the meeting. Thus, dissidents can use this exemption
to overcome the effect of the record date by quietly soliciting proxies from 15 or
fewer shareholders immediately before the meeting.
Second, if the dissident solicits by way of "public broadcast, speech or publi-
cation", in the prescribed circumstances, then the dissident need not send a proxy
circular to the corporation and directors as otherwise required by section 150(1).52
(ii) Strategies to Replace Directors Under a Meeting Called by the Shareholder
The CBCA also provides shareholders with the ability to requisition a meeting.
The shareholder-requisitioned meeting can be used for the purpose of, inter alia,
replacing the directors. In accordance with section 143(1), the shareholder requi-
sitioning the meeting must hold no less than
5
% of the shares.
54
The sharehold-
er who calls such a meeting is required to comply with many of the same rules
that apply to an annual meeting." This might also be a more expensive option
than a shareholder proposal, as section 143(6) states that "the corporation shall
reimburse the shareholders the expenses reasonably incurred by them in requisi-
tioning, calling and holding the meeting".
6
As a result, unlike the cost of the share-
holder proposal, which is borne by the corporation, the directors have discretion
to determine whether the expenses of a requisitioned meeting were reasonable.
III ADVANCE NOTICE PROVISIONS
As previously stated, an advance notice provision is a provision in a corporation's
articles, by-laws, or corporate governance policy that requires dissident share-
holders to provide notice in advance of a meeting of their intention to include
a nominee at the forthcoming meeting.
7
Before considering the advantages and
disadvantages of advance notice provisions, the legal mechanisms directors might
use to implement an advance notice provision will be described.
52 Ibid, s 150(1.2).
53 Ibid, s 143.
54 Ibid, s 143(1).
55 Ibid, s 143(5) (section 143(5) is contained in Part XI of the CBCA and states that a meeting "shall
be called as nearly as possible in the manner in which meetings are to be called pursuant to the by-
laws, this Part and Part XIII" of the CBCA. Part XI also contains rules that govern annual meetings:
see e.g., ibid, s 133).
56 Ibid, s 143(6) (section 143(6) states that the shareholders willbe reimbursed unless they otherwise
resolve at a meeting called under section 143(4)).
57 See generally Peterson & Cumming, supra note 2.
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I. THE MECHANISMS TO IMPLEMENT ADVANCE NOTICE PROVISIONS
Directors can implement an advance notice provision through the constating docu-
ments or through a board policy. For a CBCA corporation, the directors may adopt
the provision through an article or by-law amendment. For a British Columbia
Business Corporations Act" corporation, the directors may adopt the provision
using an article amendment or board policy.
(i) Inclusion in, or Amendment of the Constating Documents
A CBCA corporation can adopt an advance notice provision by amending, or
adding to, the by-laws or the articles. Under the CBCA, directors can amend the
by-laws with immediate effect.
59
The by-laws will cease to be effective if the by-law
does not receive shareholder approval by ordinary resolution, which requires the
support of a majority of shareholders.
60
As a result, if directors are concerned
about a shareholder ambush, they can implement an advance notice provision
immediately.
Directors can also make a proposal to amend the articles.
6
' For such a proposal
to be effective, shareholders must approve it by special resolution, which requires
the support of two-thirds of shareholders.
62
As a result, a director's proposal to
amend the articles will not have immediate effect.
(ii) Adoption of a Board Policy
Corporations established under the BCBCA do not have by-laws. Formally, the
corporate articles restrict the powers of directors and the affairs of the corpora-
tion.
6
' However, as under the CBCA, amendments to the articles are ineffective
until shareholders approve the amendments by special resolution.
64
Practically,
this can make managing the business difficult. As a result, directors of BCBCA
corporations often use board policies to set out internal government rules for the
58 BCBCA, supra note 10.
60 Ibid, s 103(2) (an "ordinary resolution" is defined in section 2(1) as "a resolution passed by a ma-
jority of the votes cast by the shareholders who voted in respect of that resolution").
61 Ibid, s 175(1).
62 See ibid, ss 173(1), 176(6) (a "special resolution" is defined in section 2(1) as "a resolution passed
by a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of
that resolution or signed by all the shareholders entitled to vote on that resolution").
63 See e.g., BCBCA, supra note 10, s 12.
64 Ibid, s 259(1) (a special resolution is required unless the articles specify that a different type of
resolution is required to amend the articles).
38
VOL 71 2)
affairs of the corporation.
6
' As discussed below, the British Columbia Supreme
Court in Mundoro held that directors could implement an advance notice provi-
sion using a board policy, provided the board policy is not contrary to the articles
or the BCBCA.
66
1I. THE ADVANTAGES OF ADVANCE NOTICE
Advance notice provisions can provide advantages to both directors and share-
holders. Although corporate news releases often cite the benefits to shareholders
as a reason for adopting these provisions,
67
they can also benefit directors.
(i) Directors' Perspective
Advance notice provisions provide the directors with a warning that a dissident
is seeking to replace them. An advance notice provision destroys the element
of surprise and the ability of dissidents to use a shareholder ambush to replace
incumbent directors. Further, as illustrated below in Mundoro, having notice
can provide sufficient time for the directors to mount an offensive campaign to
promote their nominees (usually themselves) and discredit the nominees of the
dissident shareholders.
Alternatively, advance notice provisions can allow directors to concentrate on
managing the corporation rather than inefficiently concentrating on the possibil-
ity of dissident nominations. If advance notice provisions permit shareholders to
nominate directors only during a brief period of the year, the incumbent directors
can spend the rest of the year focused on maximizing firm value.
(ii) Shareholders' Perspective
Non-dissident shareholders may benefit from advance notice provisions by being
provided with information that can help them make an informed decision with
respect to electing directors.
68
Under Canadian corporate law, informed share-
holders should enhance shareholder democracy for several reasons. First, in elec-
tions they believe are uncontested, shareholders may decide not to attend the
65 See generally Bob Pakrul, "The Power of Board Policies" (11 September 2012), online: Alexan-
der Holburn Beaudin + Lang LLP Business Law Blog <http://businesslawblog.ahbl.ca/2012/09/11/
the-power-of-board-policies/>.
66 See Mundoro, supra note 6 at paras 45-46.
67 See e.g., Duncastle Gold Corp, News Release, "Duncastle Adopts Advance Notice Policy for
Director Nominations" (8 March 2013), online: Duncastle <http://www.duncastlegoldcorp.com/
en/news/77/duncastle-adopts-advance-notice-policy-for-director-nominations.php> [Duncastle ANP
release].
68 Institutional Shareholder Services Inc, "Canadian Corporate Governance Policy: 2013 Updates"
(16 November 2012) at 13, online: Institutional Shareholder Services (ISS) <http://www.issgover-
nance.com>.
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39
shareholder meeting.
69
As a result, this could exclude a large number of sharehold-
ers from having the opportunity to vote in favour of the dissident's nominees or
management's nominees.
Second, shareholders of a corporation without a majority voting policy could
lack an incentive to vote. When only the incumbent management has proposed
nominees, shareholders can only vote in favour of the proposed nominees or
withhold their vote. In a corporation without a majority voting policy, one vote
in favour of an uncontested nominee is sufficient for the nomination to succeed.
Therefore, in such corporations, if shareholders are unaware of a contested battle,
they could lack the incentive to vote, because they may assume that at least one
shareholder will vote in favour of the uncontested nominees\. This will typically
be a reasonable assumption because self-nominated directors typically hold voting
shares of the corporation.
Third, because of the CBCA's definition of ordinary resolution,
70
significantly
fewer than 50% plus one of the shareholders could determine the directorship of
the corporation, as the nominees in a contested election must receive 50% plus
one of the votes cast to become the directors. Because success turns on the votes
cast, weak voter participation can result in a shareholder with fewer than 50%
plus one of the corporation's voting rights independently electing the corporation's
directors. For example, where voter participation is weak, a 10% voting interest
may be sufficient to guarantee an ordinary resolution.
7 1
III. THE DISADVANTAGES OF ADVANCE NOTICE
Although corporate news releases tout the benefits of advance notice provisions,
they generally fail to set out the possible disadvantages of such provisions. While
advance notice provisions are more likely to harm shareholders, these provisions
can also create disadvantages for incumbent directors.
(i) Directors' Perspective
Although there are probably few disadvantages to directors from implementing
advance notice provisions, such provisions may work against incumbent manage-
ment. For example, in the absence of an advance notice provision, a shareholder
ambush may ultimately be ineffective because the dissident misjudged the number
of votes required to win the election; however, if the advance notice provision
requires a dissident to launch a campaign and gather support, which the dissi-
dent would not otherwise have done, then the advance notice provision may work
against the directors.
69 See e.g., Mundoro, supra note 6 at paras 32, 35.
70 CBCA, supra note 10, s 2(1) (an "ordinary resolution" is defined as "a resolution passed by a major-
ity of the votes cast by the shareholders who voted in respect of that resolution").
71 See e.g., Puri, supra note 25 at 495.
VOL 71 2) 40
(ii) Shareholders' Perspective
Advance notice provisions can create specific disadvantages to dissident and
non-dissident shareholders. From a dissident shareholder's perspective, the intro-
duction of an advance notice provision will prevent them from using a sharehold-
er ambush. As discussed earlier, the element of surprise can be an effective tool
for replacing management, but surprise will be lost if dissidents are required to
disclose their intention and nominees prior to the election date.
From a non-dissident shareholder's perspective, if the dissident's nominees
would be more effective in upholding the interests of shareholders than the incum-
bent management, non-dissident shareholders may miss the opportunity for better
management.
Further, advance notice provisions may adversely affect shareholders by
increasing the risk of managers acting contrary to the best interests of the corpor-
ation, and increasing the related agency costs. As discussed previously, the ability
of shareholders to replace directors can reduce the risk of managers acting oppor-
tunistically and can help to control agency costs. Where advance notice provisions
negatively impact the ability of a shareholder to replace opportunistic directors,
agency costs may increase. Moreover, this type of use of advance notice provi-
sions may weaken the market for corporate control and increase opportunistic
management behaviour and agency costs, because the "market for corporate
control depends on the ability of an acquirer of shares to vote to oust directors".
7 2
Directors might entrench themselves by using the advance notice provisions to
reduce the chance of shareholders nominating alternative directors.
Lastly, whether the "corporate contract" permits directors to use by-laws to
adopt an advance notice provision is questionable. The CBCA is based on a report
by Robert WV Dickerson called Proposals for a New Business Corporations Law
for Canada." The Dickerson Report included a draft corporate statute and accom-
panying commentary on every proposed statutory provision. Section 103 of the
CBCA is substantially the same as section 9.02 of the Dickerson Report. Both
the CBCA and the Dickerson Report give shareholders and directors the power
to amend the corporation's by-laws. As Part II discussed, shareholders or direc-
tors can use the corporate by-laws to modify the "corporate contract". However,
the Dickerson Report's interpretation of directors' ability to change the corpor-
ation's by-laws might not allow directors to implement an advance notice provi-
sion. According to the Dickerson Report, directors' ability to make a by-law does
not grant directors "the power to control the internal government of the corpor-
72 Ibid at 196.
73 Ed Waitzer & Johnny Jaswal, "Peoples, BCE, and the Good Corporate 'Citizen"' (2009) 47:3
Osgoode Hall LJ 439 at 445, citing Robert WV Dickerson et al, Proposals for a New Business Corpor-
ations Law for Canada, vol 1 (Ottawa: Information Canada, 1971) [Dickerson Report].
SPRING
2013 41
ation to the exclusion of shareholders".
74
In considering the division of control,
the Dickerson Report's draft corporate statute acknowledged "the realities of
corporate management by placing residual control of internal government where
it belongs-with the shareholders-but giving the directors power to administer the
corporation from day to day".
75
As a result of the Dickerson Report's interpreta-
tion of directors' power to make by-laws, it is unclear whether directors can use a
bylaw to change the "corporate contract" in a manner that prevents shareholders
from nominating directors during a substantial part of the year.
In short, advance notice provisions provide shareholders and directors with
advantages and disadvantages. While these provisions can encourage sharehold-
er democracy, they can also harm it. Although corporate news releases do not
generally discuss the effect of these provisions on directors, there is reason to
believe that directors might be motivated to use advance notice provisions to their
advantage. In addition, as will be discussed in Part V, whether the advantages to
shareholders of an advance notice provision outweigh the disadvantages will likely
depend on the mechanism that directors use to implement the provision.
IV ADVANCE NOTICE PROVISIONS IN PRACTICE
Canadian courts had the opportunity to consider advance notice provisions
on two occasions in 2012. First, in Mundoro,'
6
the British Columbia Supreme
Court considered whether an advance notice provision offended the BCBCA.
Second, in Maudore,
7 7
the Ontario Superior Court of Justice considered whether
an advance notice provision was oppressive to the dissident under the Ontario
Business Corporations Act.
7
' As will be discussed in Part V, the board of directors
of Mundoro Capital Inc ("Mundoro") and Maudore Minerals Ltd ("Maudore")
adopted advance notice provisions that could harm the interests of shareholders.
However, because both boards postponed the meetings in which director nomin-
ations were to be considered, the respective Courts did not address whether
the advance notice provisions frustrated the right of shareholders to nominate
directors. Further, neither Court addressed how the window of opportunity to
nominate directors might affect shareholders as a whole. This section of the article
discusses Mundoro and Maudore. The remainder of the article will consider the
potentially problematic uses of advance notice provisions under Canadian corpor-
ate and securities law.
74 Ibid at para 194.
76 Supra note 6.
77 Supra note 9.
78 OBCA, supra note 10.
VOL 71 (2) 42
I. MUNDORO
(i) Background
Mundoro is a corporation established under the BCBCA that operates in the
mineral resource sector, with a focus on development, exploration, and invest-
ment.79 It holds mineral interests in Mexico and Serbia,o and the majority of
Mundoro's shareholders are retail investors.
On April 20, 2012, Mundoro gave notice that it would hold its annual general
meeting on June 26, 2012, and set the record date for May 22, 2012.82 On May
22, 2012, it issued a management proxy circular. The management proxy circu-
lar stated that the meeting would provide shareholders with an opportunity to
receive the financial statements of the company, elect directors, and reappoint the
auditors." On June 9, 2012, Mundoro's board implemented an advance notice
provision.
84
It announced the advance notice provision on June 11, 2012," which
was 15 days before the meeting. The provision required notice of director nomin-
ations between 30 and 65 days prior to the meeting.
6
In addition, the provision
provided that "the chairman of the meeting had the power and duty to deter-
mine whether a nomination was made in accordance with the [provision] and that
the board in its sole discretion could waive any requirement of the [provision]"."
The provision also contained a carve-out that permitted shareholders to make
proposals and requisitions outside of the permitted period." In effect, the provi-
sion prohibited shareholders from making nominations without prior notice to the
corporation, because the directors enacted the requirement 15 days before the
meeting and the provision required shareholders to give notice at least 30 days
before the meeting.
Northern Mineral Investments ("NMI") is a privately held BCBCA corpor-
ation. At the time of the Court's decision, NMI held approximately 8.4% of
Mundoro's shares.
89
On June 13, 2012, NMI, a dissident shareholder, notified
79 See e.g., Mundoro Capital Inc, "Investor Factsheet" (April 2013), online: Mundoro <http://www.
mundoro.com/factsheet>.
80 Ibid.
81 Mundoro, supra note 6 at para 3.
82 Ibid at para 4.
83 Ibid at para 5.
84 Mundoro Capital Inc, News Release, "Mundoro Capital Inc. Approves Advance Notice Policy"
(11 June 2012), online: Mundoro <http://www.mundoro.com/news/2012> [Mundoro ANP release].
85 Ibid; Mundoro, supra note 6 at para 6.
86 Mundoro ANP release, supra note 84.
88 See Mundoro ANP, supra note 4.
SPRING
2013 43
Mundoro that NMI believed Mundoro had no legal basis for instituting the advance
notice provision.
90
The next day, June 14, 2012, Mundoro announced that it would
seek shareholder approval of the provision and would postpone the annual meet-
ing.
91
Also on June 14, 2012, NMI challenged the provision by bringing an applica-
tion to the British Columbia Supreme Court.
9 2
Four days later, on June 18, 2012,
NMI announced a slate of directors for nomination at the forthcoming meeting.
93
NMI's slate included John (Zong Hai) Han, who was the CEO of NMI.
94
NMI's
slate announcement stated that it was seeking to replace the incumbent directors
because the share price had fallen
7
5% since December 2009, and the corporate
expenses had been unreasonably high over the past five years.
95
(ii) Decision
NMI's application sought an order preventing Mundoro from postponing
or adjourning the June 26, 2012 meeting, an order preventing Mundoro from
changing the record date, and an order declaring that the advance notice provision
was unenforceable.
96
(a) Postponing the Meeting and Changing the Record Date
Justice Punnett dismissed NMI's argument that the directors could not post-
pone the meeting for two reasons. First, Punnett J held that the BCBCA permits
directors to postpone an annual meeting. He concluded that the BCBCA grants
directors residual powers to manage the business and affairs of the corporation,
because an interpretation providing directors with only those powers that the
BCBCA explicitly grants would be unduly restrictive and could lead to unreason-
able results.
97
Further, Punnet J held that as a matter of contractual interpretation,
90 Ibid at para 7.
91 Ibid at para 8; Mundoro Capital Inc, News Release, "Mundoro Capital Inc. Postpones Annual
General Meeting of Shareholders" (14 June 2012), online: Mundoro <http://www.mundoro.com/
news/2012> [Mundoro postponement release].
93 Ibid at para 33. See generally Mundoro Capital Inc, News Release, "Mundoro Capital Inc.
Comments on Dissident Action" (19 June 2012), online: Mundoro <http://www.mundoro.com/
news/2012>. On the same day, Mundoro implemented a shareholder rights plan (known colloquially
as a poison pill): see Mundoro Capital Inc, News Release, "Mundoro Capital Inc. Announces the
Adoption of a Shareholder Rights Plan" (18 June 2012), online: Mundoro <http://www.mundoro.
com/news/2012>.
94 Northern Minerals Investment Corp, Press Release, "Northern Minerals Investment Corp An-
nounces Nominees for Election to the Board of Directors of Mundoro Capital Inc" (18 June 2012),
online: Marketwire <http://www.marketwire.com/press-release/northern-minerals-investment-corp-
announces-nominees-election-board-directors-mundoro-tsx-venture-mun- 1670685.htm>.
95 Ibid.
97 Ibid at para 26.
VOL 71 (2)
44
the BCBCA and Mundoro's articles granted the directors residual powers to post-
pone a meeting.
98
Second, Punnett J concluded that NMI's late nomination announcement
gave rise to circumstances that justified the postponement of the meeting.
99
He
reasoned that NMI's late nomination announcement did not leave enough time
for the directors to ensure that all of the shareholders "were advised and given
the opportunity to attend or submit their proxies".
100
Further, Punnett J held that
"there was no evidence that the board was not acting in the best interests of the
shareholders".101
He also dismissed NMI's request for an order preventing Mundoro from
changing the record date.
102
He held that the authority to change the record date
follows from the ability to postpone the annual general meeting.
103
(b) Adopting the Advance Notice Provision
Justice Punnett dismissed NMI's request for a declaration that the advance notice
provision was unenforceable.
104
However, he suggested that courts should consid-
er each case based on the circumstances.
10
Here, he found that the circumstances
did not warrant intervention.
Punnett J held that neither the BCBCA nor the articles prevented the directors
from adopting an advance notice provision.
1 06
There were two reasons for this
holding. First, as NMI admitted, the BCBCA is silent on the ability of directors to
adopt an advance notice provision.
10
' Second, Mundoro's articles provided that the
directors must "manage or supervise the management of the business and affairs
of [Mundoro] and have the authority to exercise all such powers of [Mundoro]
as are not, by the [BCBCA] or by these Articles, required to be exercised by the
shareholders of [Mundoro]".
10
98 Ibid.
99 Ibid at para 36.
103 Ibid.
105 Ibid at paras 47, 53.
106 Ibid at paras 45-46.
107 Ibid.
108 Ibid at para 45, citing Mundoro Capital Inc, "Certificate of Incorporation" (8 May 2008), s 15.1,
online: System for Electronic Document Analysis and Retrieval (SEDAR) <www.sedar.com>, filed as
"Security holders documents - English", Mundoro Capital Inc (8 May 2008).
SPRING
2013 45
Further, Punnett J held that the evidence did not establish that the advance
notice provision infringed shareholder rights. Rather, the provision in this case
ensured an orderly nomination process and provided all shareholders with the
opportunity to become informed about the director nominees.
1 09
The advance
notice provision therefore "prevent[ed] a group of shareholders from taking advan-
tage of a poorly attended shareholders meeting to impose their slate of directors on
what could be a majority of shareholders unaware of such a possibility arising".
110
In addition, Punnett J held that the provision "evidence[d] good faith and
reasonableness", because the directors retained discretion to waive any require-
ment of the provision, their decision to exercise discretion was subject to judi-
cial review, and they planned to seek shareholder approval at the annual general
meeting."
Finally, Punnett J found that Mundoro's directors did not implement the
advance notice provision "to 'influence or preclude' a proxy contest".
112
Instead,
they implemented the provision to ensure that the shareholders were aware of the
proxy contest.
1
(iii) Subsequent Events
Mundoro held its annual general meeting on August 27, 2012. The advance
notice provision did not receive the two-thirds approval and was thus not effective
going forward, but the shareholders re-elected management's slate of directors.
114
Despite the previously unsuccessful provision, Mundoro announced on November
9, 2012 that it had adopted a number of corporate governance policies, includ-
ing an advance notice provision, which shareholders must approve at the next
meeting.
1
In summary, Mundoro's directors implemented an advance notice provision
after the cut-off date. In the face of shareholder challenge, Mundoro's directors
postponed the meeting and resolved to seek shareholder approval. Because the
directors postponed the meeting, NMI was able to nominate directors without
violating the provision. While the Court concluded that this particular advance
notice provision was enforceable, it suggested that courts should consider provi-
sions on a case-by-case basis.
110 Ibid.
113 Ibid.
114 Mundoro Capital Inc, News Release, "Mundoro Thanks Shareholders for Their Support" (28
August 2012), online: Mundoro <http://www.mundoro.com/news/2012>.
115 Mundoro Capital Inc, News Release, "Mundoro Announces 03 Financials and Comprehen-
sive Governance Policies" (9 November 2012), online: Mundoro <http://www.mundoro.com/
news/2012>.
VOL 71 (2)
46
1I. MAUDORE
(i) Background
Maudore is a Canadian mining corporation established under the OBCA.
116
Maudore's shares are listed on the TSX Venture,
11 7
and the company specializ-
es in mining gold," with its assets located in Quebec, Canada.H
9
Collectively,
The Harbour Foundation and City Securities Limited (together, "Harbour") is
Maudore's largest shareholder.
120
Seager Rex Harbour ("Mr. Harbour") and his
son Daniel Harbour ("Dr. Harbour") are trustees of The Harbour Foundation,
and Mr. Harbour is the founder and principal of City Securities Limited.
121
In 2011, Mr. Harbour became concerned about Maudore's management.
To address his concerns, he sent Dr. Harbour and Howard Carr ("Dr. Carr"),
an economic geologist and family friend, to visit Maudore's mine in Val D'Or,
Quebec.
122
Before allowing Dr. Carr to visit the mine, Maudore's CEO, Ronald
Shorr, required Dr. Carr to sign a confidentiality agreement.
123
During the visit,
Dr. Carr concluded that Maudore's publicly-disclosed mining information was
correct, but that Maudore's CEO possessed no technical knowledge and the exist-
ing management was mismanaging the geological consultants.
124
Subsequently, on April 11, 2012, Maudore's board of directors gave notice
that the annual meeting would occur on June 8, 2012, and that the record date
would be May 4, 2012.125 The board also struck a special committee of independ-
ent directors to respond to Mr. Harbour's concerns when it became clear that
he might initiate a proxy context.
126
On April 23, 2012, Mr. Harbour contacted
Maudore's CEO and proposed that Dr. Carr replace him, and that the board
nominate a new Chairman.
127
Mr. Harbour also indicated that he did not wish to
replace the entire board of directors.
128
Nevertheless, Maudore's CEO and board
116 See e.g., Maudore Minerals Ltd "Annual Audited Financial Statements" (31 December, 2011)
at 8, online: Maudore <http://www.maudore.com/s/FinancialStatements.asp> [Maudore Annual
Report].
117 Maudore, supra note 9 at para 10.
118 Maudore Annual Report, supra note 116.
119 Ibid at 18-19.
128 Ibid.
SPRING
2013 47
of directors refused to implement Mr. Harbour's proposal.
129
In response, Mr.
Harbour decided to propose his own slate of directors for the board.O
On May 25, 2012, Maudore announced that it had amended its by-laws
to include an advance notice provision.' The provision, like that in Mundoro,
required shareholders to inform the directors of any proposed nominations at
least 30 days, and not more than 65 days, before the annual meeting. In contrast
to Mundoro, Maudore instituted the provision before the cut-off date. However,
the directors implemented the provision only five days before the cut-off date,
and Maudore refused to respond (to the dissident's satisfaction) to the dissident's
request for clarification on how the provision should be interpreted.
13 2
In light of
the contentious relationship between the parties, Maudore may have resisted the
dissident's request for clarification as a stalling tactic to prevent the dissident from
complying with the by-law.
3
On June 4, 2012, Harbour attempted to comply with the advance notice
requirement.
134
The following day, Maudore announced that it was postponing the
shareholder meeting date and the record date to July 29, 2012 and June 8, 2012,
respectively.' Notably, Habour's nomination announcement was fewer than 30
days from the date of the shareholder meeting, but any issue of compliance with
the advance notice provision was moot after the directors postponed the meeting.
(ii) Decision
Maudore brought a motion seeking injunctive relief against Harbour's use of
Dr. Carr's confidential information. Harbour brought a counter-motion seeking
declaratory and injunctive relief from Maudore's allegedly oppressive conduct.
Justice Perell applied the injunction test from RJR-Macdonald V Canada (AG)
to reject each party's request.
6
He held that neither party could establish a strong
prima facie case, nor could they establish that the balance of convenience favoured
an injunction, as the test requires.
1 37
129 Ibid.
130 Ibid.
133 One might also speculate that Maudore hoped to later challenge the dissident's compliance with
the ANP if the dissident was successful in the vote.
136 Maudore, supra note 9 at para 74, citing RJR-MacDonald Inc v Canada (AG), [ 1994] 1 SCR 311,
111 DLR (4th) 385.
137 Maudore, supra note 9 at paras 91-92, 98, 119-20.
48 VOL 71 2)
(a) Maudore's Request for an Injunction
Justice Perell denied Maudore's request for an injunction prohibiting Harbour
from voting its securities.' Although he found that Harbour likely obtained confi-
dential information, he held that Maudore had failed to establish a strong prima
facie case that Harbour misused confidential information.
13 9
Further, Perell J held
that the balance of convenience did not favour Maudore.
40
He reasoned that
even if Harbour misused the confidential information, it did so for the purpose of
exercising its right to engage in a proxy contest.
141
He also found that an injunc-
tion preventing Harbour from exercising its normal electoral rights would be
"draconian", because Maudore's CEO testified that Harbour gained little from
the confidential information.
14 2
Justice Perell noted that "there [was] something
to be said for [Harbour's] suggestion made during argument that the discomfort
or inconvenience [was] not genuine but rather a cover for a tactical device in the
proxy fight".
143
(b) Harbour's Request for Relief and an Injunction
Justice Perell also refused to grant Harbour a declaration or interlocutory relief
under the oppression remedy.
144
On the facts, he concluded that there was no
reason or basis to interfere with the contractual and corporate autonomy of
Maudore's board.
145
Moreover, Maudore's decision to postpone the shareholder
meeting was understandable and reasonable, especially since the board postponed
the meeting in an attempt "to appease Mr. Harbour".146
Regarding the advance notice provision, Perell J held that the provision was
not oppressive. Without giving any specific reasons or considering the particular
provision implemented, Perell J stated that "there was nothing unfair or inappro-
priate in introducing the [provision] to ensure that all shareholders would have
sufficient notice of a contested election of directors".
147
Justice Perell concluded that the Court should not grant Harbour an injunc-
tion on the ground of oppression. He held that Harbour did not show "a strong
144 See ibid at paras 4-5, 100, 120 (Justice Perell rejected Harbour's application for relief under
section 248 of the OBCA, which is the equivalent to section 241 of the CBCA).
SPRING
2013 49
prima facie case for a mandatory injunction",
148
and that Harbour would not suffer
irreparable harm if Maudore's chairman improperly conducted the sharehold-
er meeting.
4 9
Additionally, as the injunction would have essentially determined
the matter, the balance of convenience did not favour an "interference with the
contractual and corporate autonomy of Maudore and its shareholders".
5 0
(iii) Subsequent Events
The Court released the Maudore decision on July 18, 2012-the day before the
meeting. On the day of the meeting, Maudore announced that it had entered into a
settlement with Harbour that gave the dissident five of the seven board seats, and
transitioned to Harbour's preferred CEO."'
In summary, Maudore's directors implemented an advance notice provision
five days before the cut-off date and did not immediately respond to Harbour's
request for clarification about the provision. When Harbour announced its nomin-
ations after the cut-off date, Maudore's directors postponed the meeting. Because
the directors postponed the meeting, any issue of Harbour violating the provision
was moot, and the Court denied the dissident's oppression complaint. In contrast
to Mundoro, the dissident in Maudore had enough voting power to convince the
incumbent board to cede control of the company's board.
V PROBLEMATIC USE AND DRAFTING OF ADVANCE NOTICE PROVISIONS
In Mundoro,
15 2
the directors used a board policy to adopt an advance notice provi-
sion 15 days before the scheduled meeting.' The provision precluded a dissident
from nominating directors, because the provision permitted a dissident to nomin-
ate directors only between 30 to 65 days before the meeting.
154
In response to
NMI's legal challenge, Mundoro postponed the meeting and stated that it would
seek shareholder approval of the policy.
155
149 Ibid.
150 Ibid.
151 Maudore Minerals Ltd, News Release, "Annual Meeting Update" (19 July 2012), online: Maudore
<http://www.maudore.com/s/NewsReleases.asp>.
152 Mundoro, supra note 6.
153 See generally Mundoro ANP release, supra note 84; Mundoro, supra note 6 at paras 4, 6 (the
meeting was to be held on June 26, 2012 and the advance notice provision was announced on June
11, 2012).
154 Mundoro ANP, supra note 4 at 2.
155 Mundoro postponement release, supra note 91.
VOL 71 2)
50
In Maudore,"
1 6
the directors used a board policy to adopt an advance notice
provision several days before the provision prohibited a shareholder from announ-
cing nominees."' One day before the cut-off date, counsel to Harbour requested
that Maudore clarify aspects of the provision; however, Maudore refused to
respond to the request for clarification about the provision before the cut-off
date."" If Harbour's need for clarification was preventing it from complying with
the provision, the provision and Maudore's actions would have effectively preclud-
ed Harbour from nominating directors.
All of these actions work against the premise that the directors adopted
the advance notice provision to further the ability of shareholders to make an
informed decision about the management of the corporation. Specifically, when
and how directors implement an advance notice provision can determine whether
the provision is contrary to shareholders' interests, because, in certain situations,
directors can use a provision to preclude dissidents from nominating directors.
Additionally, a provision's window of opportunity can decrease the chance that
shareholders will elect a dissident's nominees.
I. TIMING AND MANNER OF ADOPTION
Directors claim that corporations should implement advance notice provisions
to ensure that shareholders receive sufficient information regarding director
nominees and to ensure they are able to register an informed vote.
15 9
However,
where a provision is instituted after the cut-off date (for example, fewer than 30
days before the meeting), shareholders are effectively prevented from nominating
directors despite the expectation that they would be able to do so. If the directors
are not attempting to entrench themselves, they could either announce the provi-
sion before the cut-off date or draft the provision so that there is an exemption for
nominations for the first meeting after the adoption of the provision-for example,
if there are 20 days until the meeting, then directors could draft the provision so
that nominations must be made 15 days prior to the first meeting. Further, because
corporate law makes directors' amendments to the by-laws effective immediately,
directors can amend the by-laws to include an advance notice provision even where
shareholders are likely to reject the provision. In Mundoro, the advance notice
provision did not expire until after the shareholders would vote for directors.
160
As
156 Maudore, supra note 9.
157 See ibid at paras 50, 54 (the meeting was changed to June 29, 2012 and the advance notice provi-
sion was announced on May 25, 2012).
159 See e.g., Duncastle ANP release, supra note 67; Mundoro ANP, supra note 4 at 1.
160 Kevin J Thomson & Melanie A Shishler, "Advance Notice Policy Becoming A Key Tool in Ca-
nadian Proxy Contests" (17 October 2012), online: Davies Ward Phillips & Vineberg LLP <http://
www.dwpv.com/en/Resources/Publications/2012/Advance-Notice-Policy-Becoming-A-Key-Tool-in-
Canadian-Proxy-Contests>.
SPRING
2013 51
a result, even if shareholders voted against the provision, they would not be able
to nominate directors from the floor of the meeting because the vote for directors
would have already occurred.
Even when directors implement an advance notice provision before the cut-off
date, the directors might use other tactics to prevent a dissident from being able
to comply with the provision. As demonstrated in Maudore, Maudore announced
the advance notice provision several days before the cut-off date, but then failed
to respond in a timely manner to the dissident's request for clarification about the
provision.
16 1
When the directors stall by failing to respond to such requests, the
directors might be using the provision to entrench themselves rather than provide
shareholders with the opportunity to consider all possible nominees.
While advance notice provisions might include a carve-out for proposals and
requisitions, the carve-out can be useless under certain situations. For example,
according to section 137(5)(a) of the CBCA and section 49 of the Regulations,
162
proposals must be submitted to the corporation at least 90 days before the anni-
versary date of the notice for the previous year's annual meeting. In addition,
directors are not required to call a shareholder-requisitioned meeting when "a
record date has been fixed under paragraph 134(1)(c) and notice of it has been
given under subsection 134(3)"1,163 or when "the directors have called a meeting
of shareholders and have given notice thereof under section 135"1.164 As a result,
corporate law may preclude a shareholder from submitting a proposal or requisi-
tioning a meeting even prior to the window of opportunity being available. Thus,
directors might use carve-outs as window dressing to disguise their intentions of
defeating a dissident's nominees.
II. PREVENTING NOMINATIONS BEFORE A SPECIFIC DATE
Advance notice provisions may also be questionable when they arbitrarily prevent
nominations before a specific date. Again, the common justification for advance
notice provisions is that they allow shareholders to be informed of other candidates
for directorship. If this is the justification, then it is unclear why advance notice
provisions should prevent shareholders from either nominating or informing other
shareholders of alternative nominations before a specific date. The advance notice
provisions in Maudore and Mundoro both prohibited nominations made more
than 65 days before the date of the annual meeting.
165
In Maudore and Mundoro,
neither the directors nor the Courts explained or analyzed why the directors set
a 65-day cut-off. While directors may argue that long drawn out proxy battles are
162 CBCA, supra note 10, s 137(5)(a); Regulations, supra note 46, s 49.
163 CBCA, supra note 10, s 143(3)(a).
164 Ibid, s 143(3)(b).
165 Mundoro ANP, supra note 4 at 2; Maudore ANP, supra note 4 at 5.
VOL 71 2) 52
a waste of corporate resources, the events between CP Rail ("CP") and Pershing
Square ("Pershing") in 2011-12 illustrate the power of a long public campaign.
On October 29, 2011, Pershing announced that it was going to attempt to
change the management team of CP.
166
Pershing proposed that CP appoint
several individuals as directors and replace the CEO.6' The incumbent board of
CP refused Pershing's request.
168
On January 23, 2012, CP announced that the
annual meeting would occur on May 17, 2012.169 The following day, January 24,
2012, Pershing informed the board that it intended to nominate its own board
members and to solicit proxies.
170
Pershing announced its intentions almost four
months before CP's annual meeting. The advanced action allowed Pershing to run
a campaign that included communication with shareholders over a four-month
period. In addition, several proxy advisor firms and a large institutional invest-
or recommended voting in favour of Pershing in early May 2012.171 Presumably,
a longer period allows proxy advisory firms and shareholders to better evaluate
the dissident's nominations. For example, the slide deck used by Pershing at its
February 6, 2012 town hall meeting was 112 slides long.
172
The proxy circular
released by Pershing on April 4, 2012 was 54 pages long.
173
Had this information
been given to the shareholders 30 to 60 days prior to the meeting, it is question-
able whether the proxy advisory firms and shareholders would have been able
to evaluate Pershing's nominees as thoroughly. Further, Pershing likely benefited
from first mover advantages. If directors have an advance notice provision in place,
then they can begin to take actions that emphasize their record of accomplishment
prior to the window of opportunity. A head start for management can be disadvan-
tageous to a dissident shareholder, because the dissident must attempt to over-
come shareholders' predetermined beliefs that management's initial communica-
tions can establish.
The 30- to 65-day window of opportunity that the advance notice provisions
in Mundoro and Maudore provided shareholders is also empirically question-
able. A study by Fasken Martineau DuMoulin LLP analyzed 101 Canadian proxy
166 "Timeline of CP Rail's proxy battle" Toronto Star (17 May 2012), online: Toronto Star <http://
www.thestar.com/business/article/1179669-timeline-of-cp-rail-s-proxy-battle> [CP Rail Timeline].
167 Ibid.
168 Ibid.
169 Ibid.
170 Ibid.
171 Ibid.
172 Pershing Square Capital Management LP, "The Nominees for Management Change" (6 Febru-
ary 2012), online: System for Electronic Document Analysis and Retrieval (SEDAR) <www.sedar.
com>, filed as "Other", Canadian Pacific Railway Limited (6 February 2012).
173 Pershing Square Capital Management LP, "CP Rising" (4 April 2012), online: System for Elec-
tronic Document Analysis and Retrieval (SEDAR) <www.sedar.com>, filed as "Information circular
- English", Canadian Pacific Railway Limited (5 April 2012).
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contests that occurred between January 1, 2008 and December 31, 2012.174 The
study considered the dissident success rate based on when the dissident initiated
the proxy contest. Specifically, the authors divided the initiation date into three
categories: 60 or more days before the originally scheduled meeting, 30 to 59 days
before the originally scheduled meeting, and fewer than 30 days before the origin-
ally scheduled meeting. The study found that when the dissident initiated the proxy
contest 60 days or more before the originally scheduled meeting, the dissident
success rate was 67%.
17
1 When the dissident initiated the proxy contest between 30
and 59 days before the originally scheduled meeting, the success rate was 410%.
176
Lastly, when the dissident initiated the proxy contest fewer than 30 days before the
originally scheduled meeting, the dissident success rate was 49%.
1 7 7
Thus, it was
found that dissidents were least likely to win a proxy contest when they initiated
the proxy contest 30 to 59 days before the originally scheduled meeting. While
the study considered only proxy contests that dissidents initiated without relying
on either of the proxy exemptions, the results of the study suggest that dissidents
can greatly benefit from running a long public campaign or a well-prepared short
campaign. In addition, the results of the study suggest that an advance notice
provision that provides shareholders with a 30- to 65-day window of opportunity,
as in Mundoro and Maudore, might reduce the chance of shareholders electing a
dissident's nominees.
Further, as demonstrated in the CP Rail saga, a dissident may approach the
board privately and have the incumbent directors appoint several of the dissident's
representatives to the board.
178
The advantage to the corporation of appointing
several of the dissident's representatives is that the incumbent management can
continue to operate the corporation according to their plan and avoid a proxy
battle.
179
However, where a provision restricts notice prior to 65 days, dissidents
will likely be cautious about alerting the board too early of their desire to have
several representatives on the board. As a result, restricting nominations before a
specified date may discourage dissidents from entering into a longer, more drawn
174 Aaron J Atkinson, Daniel Batista & Bradley A Freelan, "2013 Canadian Proxy Contest Study"
(2013) at 3, online: Fasken Martineau DuMoulin LLP <http://response.fasken.com/offers/fasken-
martineau-canadian-proxy-contests-study-2013.pdf>.
175 Ibid at 30 (the success rate is the aggregate of what the authors' categorized as partial and full
dissident wins: see ibid at 5).
176 Ibid.
177 Ibid.
178 Directors may appoint additional directors under section 106(8) of the CBCA, supra note 10. The
ability of directors to appoint additional directors is distinct from the nomination and election process.
As generally drafted, Canadian advance notice provisions do not prevent appointments.
179 For example, at the time of Pershing's request, CP Rail had 15 board members: see Reuters
"Ackman to make his pitch to CP shareholders Feb. 6" National Post (27 January 2012), online:
Financial Post <http://business.financialpost.com/2012/01/27/ackman-to-make-case-for-new-ceo-at-
cp-meeting/>. It is unlikely that the addition or replacement of several directors would significantly
affect voting outcomes.
VOL 71 2)
54
out process of negotiation and compromise, which ultimately might lead to less
waste of time, energy, and resources from dissidents and management conducting
a full-blown campaign. For example, on November 4, 2011, over six months prior
to the annual meeting, Pershing requested that the incumbent directors place two
of Pershing's representatives on the board of directors.so The existing management
refused. If an advance notice provision prohibited Pershing from making nomin-
ations earlier than 65 days before a meeting, Pershing may not have approached
the board as early, because the incumbent board would have several months to
emphasize its track record to shareholders before Pershing could nominate its
candidates for election. A 65-day limit would have forced Pershing, CP's directors,
and CP's shareholders to act on a more compressed timeline, and it is unclear
whether shareholders would consequently benefit.
VI BCE AND ADVANCE NOTICE PROVISIONS
181
In Mundoro,
18 2
the board of directors originally adopted an advance notice
provision by way of board policy 15 days before the scheduled meeting,' but
provided a nomination window of between 30 to 65 days before the meeting.
18 4
In Maudore,"" although the advance notice provision was adopted within the
provision's nomination window,
8 6
Maudore failed to clarify the provision until
the nomination window had closed." In both cases, the advance notice provision
effectively precluded the dissident from nominating directors. In addition, both
cases involved an advance notice provision that prevented nominations prior to 65
days before the meeting. As set out below, directors' use and drafting of such provi-
sions has the potential to oppress, unfairly prejudice, or unfairly disregard share-
holders' rights and interests. In Canadian corporate law, where directors' actions
raise issues of fairness or equity, courts may review the directors' actions using the
oppression remedy, which is an equitable remedy found in section 241(2) of the
180 CP Rail Timeline, supra note 166.
181 This Part applies BCE. The purpose of this article is not to question or critique the Supreme
Court's reasoning. For criticism regarding BCE see Edward lacobucci, "Indeterminacy and the Cana-
dian Supreme Court's Approach to Corporate Fiduciary Duties" (2009) 48:2 Can Bus LJ 232. See
also Jeffrey G MacIntosh, "BCE and the Peoples' Corporate Law: Learning to Live on Quicksand"
(2009) 48:2 Can Bus L 255.
182 Mundoro, supra note 6.
183 Mundoro ANP release, supra note 84; Mundoro, supra note 6 at paras 4, 6 (the meeting was to be
held on June 26, 2012 and the advance notice provision was announced on June 11, 2012).
184 Mundoro ANP, supra note 4 at 2.
185 Maudore, supra note 9.
186 See ibid at paras 50, 54 (the meeting was changed to June 29, 2012 and the advance notice provi-
sion was announced on May 25, 2012).
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CBCA that relies heavily on the particular facts of each case.' This section will
consider whether the oppression remedy should be available to a dissident share-
holder when an advance notice provision adversely affects the dissident.
According to section 241(2) of the CBCA,
If, on an application under subsection (1), the court is satisfied that in
respect of a corporation...
(a) any act or omission of the corporation... effects a result,
(b) the business or affairs of the corporation...are or have been carried
on or conducted in a manner, or
(c) the powers of the directors of the corporation...are or have been
exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly disregards the
interests of any security holder...the court may make an order to rectify
the matters complained of.'
It is clear that section 241(2) of the CBCA is subject to significant judicial
interpretation.
19 0
BCE sets out that when applying section 241(2), courts must
determine (i) whether the conduct breached the complainant's reasonable expect-
ations and, if so, (ii) whether the conduct complained of amounts to "oppression",
"unfair prejudice", or "unfair disregard".
19 1
I. REASONABLE EXPECTATIONS
A breach of reasonable expectations does not require proof of an unlawful act or
of a violation of a shareholder's legal right.
19 2
According to BCE, the sharehold-
er "must identify the expectations that he or she claims have been violated by
the conduct at issue and establish that the expectations were reasonably held".
193
Courts should determine whether the shareholder has established a reason-
able expectation on an objective basis; a reasonable expectation is a matter of
fact.
194
In Ford Motor Co of Canada v Ontario Municipal Employees Retirement
Board,
195
the Ontario Court of Appeal stated that reasonable expectations "can
188 BCE, supra note 11 at paras 56-59.
189 CBCA, supra note 10, s 241(2). For provincial equivalents to section 241 of the CBCA, see OBCA,
supra note 10, s 248; BCBCA, supra note 10, s 227; ABCA, supra note 10, s 242.
190 See generally Peterson & Cumming, supra note 2, ch 17 at 24.
191 BCE, supra note 11 at para 56.
194 See e.g., Pente Investment Management Ltd v Schneider Corp (1998), 42 OR (3d) 177 at 201-02,
113 OAC 253 (CA); Casurina Ltd Partnership v Rio Algom Ltd (2004), 40 BLR (3d) 112 at 124, 181
OAC 19 (CA).
195 (2006), 79 OR (3d) 81, 263 DLR (4th) 450 (CA) [Ford cited to OR].
VOL 71 2)
56
be proved by direct evidence or by drawing reasonable inferences from circum-
stantial evidence".
196
In International Energy and Mineral Resources Investment
(Hong Kong) Co v Mosquito Consolidated Gold Mines Ltd,
197
the British Columbia
Supreme Court relied on Ford and stated that a court could draw reasonable infer-
ences from circumstantial evidence to determine shareholders' reasonable expect-
ations of corporate voting procedures.
198
According to BCE, where a stakeholder's interests and the best interests of
the corporation do not coincide, the reasonable expectation of the stakeholder
"is simply that the directors act in the best interests of the corporation".
1 99
The
use of the word "simply" implies that where the interests coincide, the sharehold-
er may have other reasonable expectations, but will still reasonably expect that
directors will act in the best interests of the corporation. As a result, if a dissident
can demonstrate that implementing an advance notice provision was not in the
best interests of the corporation, then a dissident will have shown a breach of its
reasonable expectations.
In addition, BCE suggests that courts may consider a number of general factors
in determining whether directors breached the complainant's reasonable expect-
ations.
20 0
In determining whether the complainants had a reasonable expectation,
a court may consider
general commercial practice; the nature of the corporation; the relation-
ship between the parties; past practice; steps the claimant could have
taken to protect itself; representations and agreements; and the fair reso-
lution of conflicting interests between corporate stakeholders.
2 0
1
(i) General Commercial Practice
Commercial practice plays a significant role in shaping a dissident shareholder's
expectations.
202
According to BCE,
A departure from normal business practices that has the effect of under-
mining or frustrating the complainant's exercise of his or her legal rights
will generally (although not inevitably) give rise to a remedy.
2 03
196 Ibid at 107.
197 2012 BCSC 1191, 37 BCLR (5th) 342 [Mosquito].
201 Ibid.
203 Ibid.
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Because Canadian corporations have only recently started to adopt advance
notice provisions, 204 allowing shareholders to nominate directors at a forthcom-
ing meeting without notice can be viewed as a normal business practice. In addi-
tion, deviation from this normal business practice can undermine the ability of
shareholders to determine the corporation's board of directors, which is one of
their fundamental rights. For example, in Paulson & Co Inc V Algoma Steel Inc,
205
Cumming J considered the extent to which directors may significantly delay a
meeting requisitioned by the dissident for the purpose of nominating alternative
directors. In applying section 105 of the OBCA
2 06
-which deals with the right of
shareholders to requisition a shareholder meeting and is the Ontario equivalent of
section 143 of the CBCA
2 07
-Cumming J stated that the
fundamental right in respect of corporate governance afforded by s. 105
[of the OBCA] provides an important and valuable remedy for minority
shareholders... [that] is only meaningful if it can be exercised in a timely
and expeditious manner.
2 08
While Paulson dealt with directors significantly delaying a shareholder-requisi-
tioned meeting, the same motivations arise where an advance notice provision
effectively prevents a shareholder from nominating a director at the forthcoming
meeting, or prevents a shareholder from nominating directors prior to a set date,
because a shareholder's ability to nominate directors plays a similar role as a
corporate governance mechanism.
As discussed earlier, a dissident campaign can benefit from public support and
awareness. Because corporate law allows 15 months to pass between annual meet-
ings,
20 9
a 35-day window that ends one month before the annual meeting seems to
arbitrarily restrict a dissident's ability to launch a full public campaign and may
undermine or frustrate the shareholder's fundamental rights.
(ii) Past Practice
Courts may consider the directors' or corporation's past practice in determining
whether the shareholder had a reasonable expectation of being able to nomin-
204 David Randell & Graeme Norwood, "Advance Notice By-Laws & Defending Against a Surprise
Attack" McCarthy Tetrault LLP (15 January 2013), online: McCarthy Tetrault LLP <http://www.
canadianmergersacquisitions.com/2013/01/15/advance-notice-by-laws-defending-against-a-surprise-
attack/>. In contrast, advance notice provisions are popular in the United States, which is partly a
result of amendments to US securities laws that Canada has not subsequently adopted: see e.g., Vir-
ginia K Rosenbaum, Corporate Takeover Defenses (Maryland, United States: Institutional Shareholder
Services, 2006) at vii-viii.
205 (2006), 79 OR (3d) 191, 14 BLR (4th) 104 (Sup Ct) [Paulson cited to OR].
206 OBCA, supra note 10, s 105.
208 Paulson, supra note 205 at 201-02.
58 VOL 71 2)
ate a director at any point in time. According to BCE, past practice is especially
important "among shareholders of a closely held corporation on matters relating
to participation of shareholders in the corporation's profits and governance".
2 10
Where shareholders previously had the option to nominate a director at any point
prior to a meeting, the shareholders may have a reasonable expectation that they
would be able to do so again. Further, where the shareholders have the ability
under corporate law to nominate a director, the shareholders would likely have the
expectation that, prior to the meeting, the directors would not implement a provi-
sion that barred them from making a nomination or that made it more difficult to
have their nominees elected.
BCE cautioned against an inflexible approach to past practice. The Court
stated that "[w]here valid commercial reasons exist for the change and the change
does not undermine the complainant's rights, there can be no reasonable expect-
ation that directors will resist a departure from past practice".
211
In the abstract,
advance notice provisions do not undermine the rights of dissident shareholders.
However, when directors adopt a provision in a manner that effectively precludes
shareholders from nominating a director at the next meeting, or in a manner that
reduces the chance of a nominee being elected, courts should require the direc-
tors to explain how a less questionable provision would not have validly served
the corporation's commercial objectives. Further, unless directors indicate a
concrete commercial reason for prohibiting nominations prior to 65 days before
the meeting, courts should not take a flexible approach to past practice. In general,
courts should require the directors to explain the reasons behind selecting the
start date, end date, and length of the window of opportunity.
(iii) Preventative Steps
Courts may assess whether a dissident's expectations were reasonable in light of
steps the dissident could have taken to protect himself or herself.212 Of the factors
proposed in BCE, this factor is likely the most detrimental to a dissident's position.
A board is likely to argue that the dissident could have nominated a director prior
to the adoption of the provision.
However, this argument overlooks the fact that the directors could have
drafted the provision to permit an exception to the 30-day requirement for the first
meeting. For example, the advance notice provision could have allowed sharehold-
ers to give notice two days after the adoption of the provision. This would force a
shareholder contemplating a director nomination to announce the nominee prior
to the meeting and therefore give shareholders time to consider alternatives.
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In addition, even when directors implement a provision before the cut-off date,
as in Maudore, courts should consider the actions of the directors, such as how
Maudore stalled in answering the dissident's questions about the provision. When
the directors use stalling or drafting tactics to prevent the dissident from nomin-
ating a director, courts should not conclude that the dissident could have taken
preventative steps. However, when directors adopt a provision far in advance of
the window of opportunity and in advance of statutory limits on the rights of share-
holders to requisition a meeting or submit a proposal, courts should find that the
shareholders could have taken preventative steps to ensure that they were able to
nominate directors.
(iv) Fair Resolution
Courts may consider the fair resolution of conflicting interests. As stated in BCE,
"[T]he duty of directors to act in the best interests of the corporation compre-
hends a duty to treat individual stakeholders affected by corporate actions equit-
ably and fairly."
213
Courts will defer to the business judgment of directors where
the directors make a decision in good faith,
214
and where the decision falls within
a range of reasonable choices that the directors could have made by weighing
conflicting interests.
215
The corporation is entitled to consider the advantages of
an advance notice provision for non-dissident shareholders, but not by treating
dissidents unfairly.
216
Courts should assess an advance notice provision as a whole,
and should also assess the manner in which the directors adopted the provision
before determining that the business judgment rule justifies the directors' actions.
As discussed previously, an advance notice provision can benefit a corpor-
ation's shareholders by allowing them to fully consider any alternative nomina-
tions in deciding which directors will best serve the interests of the corporation.
However, it is inequitable and unfair to dissidents when directors decide to imple-
ment an advance notice provision in a manner that effectively precludes sharehold-
ers from nominating other candidates. Unfairness may also result where direc-
tors draft an advance notice provision in a manner that prevents a dissident from
nominating another shareholder before a certain date because of the role that time
can play, as evidenced in the saga between CP and Pershing. As set out earlier, in
cases where alternative nominees would better serve the interests of the corpora-
tion, such advance notice provisions could harm all of the shareholders.
Regardless of when the directors adopt an advance notice provision or the
length of the provision's window of opportunity, courts should consider a number
VOL 71 (2)
of factors to determine whether the drafting and adoption of the provision falls
within a range of reasonable alternatives.
One factor that courts should consider is the number of shareholders affected
by the provision. A corporation with more shareholders will require a dissident
to exert more effort and take more time to disseminate dissident information and
proxy circulars to all of the shareholders. And as evidenced in the CP Rail saga,
large public battles may require shareholders and other interested parties to spend
a significant amount of time digesting any provided information. Accordingly, if
a corporation has many shareholders, it may be necessary to permit nominations
prior to 65 days before a meeting. It may also be necessary that directors adopt
an advance notice provision before the first day of the window of opportunity and
significantly in advance of the cut-off date to provide unprepared dissidents with
enough time to determine whether to nominate alternative directors.
Another factor that should be considered is whether the corporation uses a
slate voting system. If a slate voting system is used, shareholders will require more
time to consider the full slate of nominations as opposed to several nominees
under an individual voting system. Courts should therefore require directors to
adopt advance notice provisions further in advance under the slate voting system
to give shareholders more time to weigh their options.
Balancing the BCE factors, it is arguable that a board's decision to adopt an
advance notice provision by way of board policy or by-law after the cut-off date
would breach the reasonable expectations of dissidents. Further, even where direc-
tors implement the provision in advance of the cut-off date, the circumstances
might nonetheless indicate that the provision breaches reasonable expectations of
dissidents.
II. OPPRESSION, UNFAIR PREJUDICE, OR UNFAIR DISREGARD
The second step set out in BCE requires the dissident to show that the conduct
amounts to oppression, unfair prejudice, or unfair disregard of its interests as a
security holder. As stated in BCE, "Even if reasonable, not every unmet expecta-
tion gives rise to claim under s. 241."217 Further, courts must consider the effect
of the directors' conduct on the shareholder rather than the subjective intentions
behind the directors' conduct.
218
BCE lists examples of the types of conduct that courts may characterize as
oppression, unfair prejudice, or unfair disregard of a shareholder's interests.
2 19
Oppression includes "an 'abuse of power' going to the probity of how the corpor-
218 See e.g., Icahn Partners LP v Lions Gate Entertainment Corp, 2011 BCCA 228 at para 71, 17 BCLR
(5th) 391; Brant Investments Ltd v KeepRite Inc (1991), 3 OR (3d) 289, 80 DLR (4th) 161 (CA); Walk-
er v Betts, 2006 BCSC 128, 15 BLR (4th) 114; Mosquito, supra note 197 at para 52.
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ation's affairs are being conducted".
220
Where the directors implement a provision
using a by-law amendment or board policy in a manner that effectively precludes
shareholders from nominating directors at the forthcoming meeting or makes it
less likely that shareholders will elect a dissident's nominees, courts should find
that the directors' conduct was an abuse of power affecting the integrity of how the
corporation conducts its affairs. It is less clear whether courts would find oppres-
sion where the directors implement a provision in advance of the cut-off date but
restrict the ability of shareholders to nominate directors before a specific date-for
example, prior to 65 days before the meeting; courts should consider this issue on
a case-by-case basis.
Although oppression and unfair prejudice may overlap,
22 1
unfair prejudice
involves conduct that is less offensive than oppression.
222
In BCE, the Court noted
that unfair prejudice might include
squeezing out a minority shareholder, failing to disclose related party
transactions, changing corporate structure to drastically alter debt ratios,
adopting a 'poison pill' to prevent a takeover bid, paying dividends with-
out a formal declaration, preferring some shareholders with management
fees and paying directors' fees higher than the industry norm.
2 23
All of these examples can have a negative impact on the legal and econom-
ic interests of the complainant. For example, a minority shareholder squeeze-out
involves forcing shareholders to sell their shares, regardless of whether they want
to sell.
2 24
The failure to disclose a related party transaction can be disadvanta-
geous to shareholders because other transactions may have been available but
the related-party transaction provided additional benefits to directors. In other
words, directors are acting in their own interest rather than the best interests of
the corporation. Similar to the BCE examples, where the board decides to adopt
an advance notice provision by way of board policy or by-law after the window of
opportunity has passed, the decision will be unfairly prejudicial to the dissidents,
because the provision will effectively preclude a dissident from nominating a direc-
tor. Additionally, adopting a provision that restricts nominations before a specified
date may prevent a dissident from having a realistic possibility of having his or her
nominee placed on the board.
As with the fair resolution of conflicting interests, courts should consider the
number of shareholders and the use of slate voting. Both of these considerations
may demonstrate that the effect of the provision is oppressive or unfairly preju-
223 Ibid.
224 While the squeezed-out shareholders receive fair value for their shares, they lose more than upside
potential-the shareholders lose the ability to govern and have an input into corporate affairs.
VOL 71 (2)
62
dicial to the interests of dissident or non-dissident shareholders. Again, because
dissidents require extra time to communicate information when dealing with a
widely held corporation, courts should consider whether the date on which the
directors adopted the advance notice provision and the dates pertaining to the
window of opportunity are oppressive, unfairly prejudicial, or unfairly disregard
the interests of shareholders. In addition, because slate voting can be indicative
of director entrenchment,
225
slate voting may support an oppression claim. In
considering the manner of adoption or the window of opportunity, courts should
consider whether the effect of the provision precludes a nomination or reduces the
chance of shareholders electing the dissident's nominees.
In addition to these factors, courts should also consider whether the corpora-
tion uses cumulative voting. Section 107 of the CBCA permits cumulative voting,
which works as follows:
[E]ach shareholder entitled to vote at an election of directors has the right
to cast a number of votes equal to the number of votes attached to the
shares held by the shareholder multiplied by the number of directors to
be elected, and may cast all of those votes in favour of one candidate or
distribute them among the candidates in any manner.
2 26
Cumulative voting allows a minority shareholder to use his or her multiplied
vote on one candidate, which can increase the chance of that candidate being
elected. According to the US Securities and Exchange Commission, cumulative
voting "helps strengthen the ability of minority shareholders to elect a director".
227
As a result, if a corporation uses cumulative voting, a court may view this as a
factor suggesting a lack of unfairly prejudicial conduct or oppression.
Courts may consider other factors that suggest shareholders require addition-
al time to process information. For example, shareholders will require more time
to consider information if a corporation has a large number of directors. Further,
if there are several dissidents proposing nominations or slates, shareholders will
require additional time to consider their options and make an informed decision.
In short, courts should closely scrutinize when and how directors implement
an advance notice provision. Where a board of directors adopts an advance notice
provision after the cut-off date, the board's action breaches the reasonable expect-
ations of shareholders and is oppressive. Similarly, where the directors adopt a
provision before the cut-off date but take steps to stall a shareholder from nomin-
ating directors before the cut-off date, such an action should also be viewed as
225 See e.g., David R Surat et al, "2013 Disclosure Update" (17 January 2013) at 2, online: Borden
Ladner Gervais LLP <http://www.blg.com/fr/home/publications/Documents/Publication_3238.
pdf>.
226 CBCA, supra note 10, s 107(b).
227 US Securities and Exchange Commission, "Cumulative Voting" (13 October 2004), online: US
Securities and Exchange Commission <http://www.sec.gov/answers/cumulativevote.htm>.
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an oppressive action that breaches the shareholder's reasonable expectations.
Additionally, as the 2013 Canadian Proxy Contest Study by Fasken Martineau
DuMoulin LLP evidences,
2 28
the start and end date of the window of opportunity
can unfairly prejudice dissident shareholders, because directors can implement a
window of opportunity that makes shareholders less likely to elect a dissident's
nominees.
VII THE PUBLIC INTEREST POWER
Regardless of whether a court refuses to prevent questionable uses of advance
notice provisions, securities regulators should consider whether such question-
able uses are contrary to the public interest. Securities regulators should intervene
to protect the public interest when directors use an advance notice provision to
entrench themselves, or when the provision harms the fundamental rights of share-
holders. In such cases, advance notice provisions are abusive of both shareholders
and capital markets in general. This section will set out the nature and scope of the
public interest power, consider the tension between corporate and securities law,
and apply the existing public interest jurisprudence to advance notice provisions.
I. THE NATURE AND SCOPE OF PUBLIC INTEREST POWER
Under the Ontario Securities Act,
2 29
the Ontario Securities Commission ("OSC")
has the power to make multiple orders if it is of the opinion that the order is in
the public interest.
23 0
The OSA provides for a host of potential orders, of which
the most relevant to advance notice provisions is the order available under para-
graph 4 of section 127(1). Paragraph 4 permits the OSC to make "[a]n order that
a market participant submit to a review of his, her or its practices and procedures
and institute such changes as may be ordered by the Commission".
231
The OSA
defines market participant to include "a reporting issuer or a director, officer or
promoter of a reporting issuer".
23 2
Reading these provisions together, section 127
provides the OSC with the power to make an order that a reporting issuer or its
directors institute such change as the OSC orders.
228 Atkinson, Batista & Freelan, supra note 174 at 30.
229 OSA, supra note 12.
230 Ibid, s 127.
231 Ibid, s 127(1)4.
232 Ibid, s 1(1) "market participant" para (c).
VOL 71 (2)
64
Although the OSC's public interest power is very broad,
233
the power is not
unlimited. The OSC and the courts have periodically set the boundaries and
defined the public interest power.
234
There are four key principles governing the application of the OSC's public
interest power. First, in Committee for Equal Treatment of Asbestos Minority
Shareholders v Ontario (Securities Commission),
235
the Supreme Court of Canada
held that both purposes of the OSA animate the public interest power.
236
According
to section 1.1, the two purposes of the OSA are "(a) to provide protection to
investors from unfair, improper or fraudulent practices; and (b) to foster fair and
efficient capital markets and confidence in capital markets".
237
The Supreme Court
also cautioned that "in considering an order in the public interest, it is an error to
focus only on the fair treatment of investors".
238
Second, the public interest power is remedial rather than punitive. In Re
Mithras Management Ltd,
23 9
the OSC stated that its role is not to punish past
conduct, as such a role is for the courts.
240
Instead, a primary role of the OSC is
"to restrain, as best [it] can, future conduct that is likely to be prejudicial to the
public interest in having capital markets that are both fair and efficient".
241
Third, the OSC may consider general deterrence when imposing sanctions
on a market participant. In Re Cartaway Resources Corp,
242
the Supreme Court
of Canada defined a sanction motivated by general deterrence as "a penalty that
is designed to keep an occurrence from happening; it discourages similar wrong-
doing in others".
243
However, the Court cautioned that general deterrence should
not be the only factor motivating the sanction: "The respective importance of
general deterrence as a factor will vary according to the breach of the [BCSA] and
the circumstances of the person charged with breaching the [BCSA]."
244
233 Paul G Findlay, Securities Law & Practice, loose-leaf (consulted on 15 January 2013), 3d ed (To-
ronto: Carswell, 2003), ch 22 at 36-36.1.
234 See e.g., Committee for Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities
Commission), 2001 SCC 37, [2001] 2 SCR 132 [Asbestos]; Re Cartaway Resources Corp, 2004 SCC
26, [2004] 1 SCR 672 [Cartaway]; Re Canadian Tire Corp (1987), 10 OSCB 857 [Canadian Tire]; Re
Mithras Management Ltd (1990), 13 OSCB 1600 [Mithras].
235 Asbestos, supra note 234.
237 OSA, supra note 12, s 1.1.
238 Asbestos, supra note 234 at para 41.
239 Mithras, supra note 234.
240 Ibid at 1610.
241 Ibid at 1610- 11.
242 Cartaway, supra note 234.
244 Ibid.
SPRING
2013
65
Fourth, the OSC may use the public interest power in the absence of an actual
violation of securities law. In Re Canadian Tire Corp,
24 5
the OSC stated that
[t]o invoke the public interest test of section [127], particularly in the ab-
sence of a demonstrated breach of the [OSA], the regulations or a policy
statement, the conduct or transaction must clearly be demonstrated to
be abusive of shareholders in particular, and of the capital markets in
general.
246
The protection of capital markets may require expedient action. Market
participants may act in a manner that can immediately result in serious harm to
capital markets. The OSC, in recognizing the regulatory nature of its powers,
stated that "[a] regulatory agency charged with oversight of the capital markets
must have the capacity to move quickly to stop transactions which it considers to
be injurious to the capital markets".
24 7
II. THE TENSION BETWEEN CORPORATE AND SECURITIES LAW
The regulation of corporate governance by securities regulators is not without
criticism.
248
Historically, the regulation of the nomination and approval of corpor-
ate directors was the domain of corporate law.
24 9
However, Canadian securities
law has increasingly focused on issues related to corporate governance and share-
holder rights.
250
Canadian securities regulators' attempt to mirror US securities
law may partly explain the increased regulation of corporate governance issues by
Canadian regulators.
251
Two notable areas of overlap are the director nomination
process and the oversight of shareholder approval.
(i) Securities Law and the Director Nomination Process
Various parts of the CBCA regulate the director nomination process. The CBCA
regulates both the procedural and substantive rights of the corporation and the
shareholders. The purpose of the CBCA sections on proxy solicitation is sharehold-
er protection.
25 2
In addition, securities law also regulates the information circular
245 Canadian Tire, supra note 234.
246 Ibid at 947.
247 Ibid.
248 Mary G Condon, Anita I Anand & Janis P Sarra, Securities Law in Canada: Cases and Commen-
tary, 2d ed (Toronto: Emond Montgomery, 2010) at 428.
249 See ibid at 447.
250 Ibid at 427.
251 Ibid.
252 Re Pacifica Papers Inc, 2001 BCSC 1069 at para 93, 92 BCLR (3d) 158, citing CBCA, supra note
10, s 150(1).
VOL 71 2)
66
and proxy process.
253
According to Mary Condon, Anita Anand, and Janis Sarra,
the information circular and proxy process allows "investors to exercise their rights
to participate through voting and shareholder proposal mechanisms, granted to
them by both corporate and securities law statutes".
254
Fairness and efficiency of
capital markets is dependent on the ability of shareholders to have confidence that
the corporation that they partly own is being managed in its best interests. As a
result, shareholders utilize proxy and proposal provisions to oversee the govern-
ance of the corporation.
255
In addition, where a dissident shareholder is able to
exercise his or her participation rights, the signal from the dissident's actions can
benefit other shareholders.
Given that securities law is already involved in the oversight of the proxy
mechanism, the consideration of corporate actions that affect shareholder voting
would be a logical step to maintaining public confidence in the market as well as
ensuring that markets are operating fairly and efficiently.
(ii) Securities Law and Poison Pills
A shareholder rights plan, often known as a "poison pill", is a defensive measure
that directors can use to prevent a takeover of the corporation.
25 6
Like the advance
notice provision, the use of poison pills is not uncommon.
25 7
When a party triggers
a poison pill, the pill permits non-triggering shareholders to acquire additional
shares at below market value.
258
Usually, a triggering event occurs when a share-
holder obtains a set percentage of the corporation's shares.
25 9
The pill creates a
disincentive for a shareholder to trigger the pill because the pill will dilute the
triggering shareholder's interest in the corporation. Similar to an advance notice
provision, in the right circumstances, the pill can serve the best interests of the
corporation.
260
Nevertheless, securities regulators have been sceptical of poison
pills because of the risk that directors might use poison pills to entrench them-
selves.
261
Canadian regulators will issue a cease trade order against securities
subject to a poison pill where the pill is contrary to the public interest.
262
253 See e.g., National Instrument 51-102 - for financial years beginning on or after January 1, 2011
(unofficial consolidation), OSC NI 51-102 (31 October 2011), Part 9, online: Ontario Securities Com-
mission <http://www.osc.gov.on.ca/en/13342.htm>; OSA, supra note 12, Part XIX.
254 Condon, Anand & Sarra, supra note 248 at 429.
255 Ibid at 431.
256 Ibid at 559.
257 See e.g., Re 1153298 Alberta Ltd, 2005 ABASC 725 at para 46 [1153298 Alberta].
258 Condon, Anand & Sarra, supra note 248 at 559.
259 Christopher C Nicholls, Mergers, Acquisitions, and Other Changes of Corporate Control, 2d ed
(Toronto: Irwin Law, 2012) at 254-55.
260 See e.g., 1153298 Alberta, supra note 257 at para 46.
261 See e.g., ibid.
262 See e.g., ibid at para 85.
SPRING
2013
67
In evaluating the actions of directors, securities regulators have emphasized
the importance of preserving the ability of shareholders to exercise the fundamen-
tal rights of share ownership. In the poison pill context, the OSC has stated that
the public interest lies in allowing shareholders of a target company to
exercise one of the fundamental rights of share ownership-the ability to
dispose of shares as one wishes-without undue hindrance from.. .defen-
sive tactics.. .adopted by the target board.
263
Further, securities regulators have used their public interest power to remove
a poison pill when the directors' only possible justification was to entrench them-
selves. In Re 1153298 Alberta,
264
the Alberta Securities Commission (ASC) dealt
with whether the commission should cease trade shares subject to a poison pill.
A bidder had made an offer for the shares of the target corporation that would
remain open until July 29, 2005.265 On July 28, 2005, the target corporation's
board adopted a poison pill that would be triggered by a bidder if the bidder
acquired a threshold number of shares otherwise than in a transaction approved
by the target's board of directors.
266
The directors did not give shareholders the
opportunity to approve the poison pill and the bidder subsequently applied to the
ASC for an order terminating the operation of the pill.
267
In defending its actions,
the target company submitted to the ASC that the poison pill was in the interest of
shareholders because it would allow shareholders to benefit from bids anticipated
to be received on August 1, 2005.268 The ASC considered that the original bid was
to close only three days before the date on which the target board anticipated it
would receive competing offers, and suggested that having an additional weekend
to obtain competing bids was a very weak basis for upholding the pill.
269
The ASC
concluded that failing to prevent the adoption of the pill in the circumstances
could have undermined the predictability of the take-over bid process
generally[, which]...would operate to the detriment of other market par-
ticipants who in [the] future might find themselves pondering, or engaged
in some capacity in, a [take-over] bid of their own and wondering how
they ought to proceed or not proceed.
2 7 0
The ASC suggested that only management seeking to entrench itself "would
benefit from such uncertainty and unpredictability",
271
and went on to hold that
263 Re Canadian Jorex Ltd (1992), 15 OSCB 257 at 266 [Jorex].
264 1153298 Alberta, supra note 257.
265 Ibid at para 2.
271 Ibid.
68
VOL 71 2)
it was in the public interest to make an order that prevented the poison pill from
operating.
27 2
The ASC intervened because of concerns over the ability of directors
to entrench themselves and to abuse their powers by stripping shareholders of
fundamental shareholder rights.
II. THE PUBLIC INTEREST POWER AND PROBLEMATIC USES OF ADVANCE
NOTICE PROVISIONS
As stated above, Canadian Tire provides that in the absence of a specific breach of
securities law, securities regulators should only use the public interest power when
directors' actions are abusive to shareholders and of capital markets in gener-
al.
273
An action is not abusive simply because it is unfair.
274
According to Re Sears
Canada Inc,
275
the definition of "abusive" generally means to mistreat.
27 6
Further,
Sears suggests that the OSC prefers a malleable definition of "abusive" that it can
apply when the circumstances indicate a remedy is necessary.
277
As argued above
in Part VI, a board's adoption of an advance notice provision after the cut-off
date using a board policy or by-laws is an abuse of power affecting the integrity of
how the corporation's affairs are being conducted. Moreover, depending on the
circumstances, courts may find oppression or unfair prejudice where the provision
restricts shareholders from making a nomination before a specific date.
While Canadian Tire suggests that a commission cannot resort to the public
interest power where the conduct is merely unfair,278 a commission should not
conflate "unfair" and "unfair prejudice". "Unfair prejudice" contains an extra
element that is beyond mere unfairness. This is evident in BCE, where the Court
indicates that "unfair disregard" is less serious than "unfair prejudice".
27 9
Further,
National Policy 62-202,280 which addresses defensive tactics such as poison pills,
states that securities regulators "are prepared to examine target company tactics
in specific cases to determine whether they are abusive of shareholder rights".
281
In
BCE, the Court stated that the adoption of a poison pill is an example of "unfair
273 Canadian Tire, supra note 234 at 947.
274 Ibid.
275 (2006), 35 OSCB 8781.
276 Ibid at 8814.
277 Ibid.
278 Canadian Tire, supra note 234 at 947.
280 Notice and Rescission and Final National Policy (effective 4 August 1997): NP - 62-202 - Take-
Over Bids - Defensive Tactics, OSC NP 62-202 (4 July 1997), online: Ontario Securities Commission
<http://www.osc.gov.on.ca/en/13274.htm> [NP 62-202].
281 Ibid, s 1.1(3) [emphasis added].
SPRING
2013
69
prejudice".
28 2
Surely, the Court was not implying that securities regulators should
consider the adoption of a poison pill to be merely "unfair" for securities law
purposes when the Court characterized the adoption of a poison pill as conduct
that was "unfair prejudice".
As in the poison pill context, securities regulators should constrain the use of
an advance notice provision where "it is unlikely to achieve any further benefits for
shareholders".
28 3
Securities regulators should not question every advance notice
provision. In particular, where a board amends corporate articles to implement
a provision sufficiently in advance of the cut-off date, and the provision does not
contain a restriction on notice prior to a certain date, the provision is prima facie
consistent with the public interest, because the provision will not be effective until
it is approved by two-thirds of shareholders and it will not prevent appropriately
long campaigns.
Alternatively, where the circumstances suggest that directors are being abusive
to shareholders and capital markets in general, regulators should consider whether
the directors' actions and the advance notice provision are in the public interest.
In particular, advance notice provisions that are implemented in an attempt to
entrench management or to constrain the fundamental rights of shareholders are
abusive of shareholders and the capital markets in general because of the import-
ant role that shareholder voting has in ensuring directors act in the best interests
of the corporation. Further, whether shareholders are able to vote on an advance
notice provision, or whether the directors have complied with their corporate law
duties, should not independently determine whether the provision is contrary to
the public interest.
(i) Management Entrenchment
One common feature of poison pills and advance notice provisions is that a board
can implement them to entrench itself.284 In assessing the public interest, regulators
will be particularly concerned where there are indications that the shareholders
"are being unduly or unfairly deprived of the ability to respond to opportunities
relating to their investment "285-for example, where "steps [are] taken by target
company management to ward off a potential acquirer in an attempt to entrench
management's own position".
28 6
Similarly, as stated by the OSC, "Board process
will be compromised where.. .decisions by the target board or special committee
283 C.f Re Baffinland Iron Mines Corp (2010), 33 OSCB 11385 at 11389, 77 BLR (4th) 143.
284 Pakrul, supra note 65.
285 Re 1478860 Alberta Ltd, 2009 ABASC 448 at para 36.
286 Ibid.
VOL 71 2) 70
suggest entrenchment."
28 7
As in the poison pill context,288 securities regulators
should consider using the public interest power where the only justification for the
advance notice provision appears to be the entrenchment of management.
If a board uses a by-law or board policy to adopt an advance notice provision,
securities regulators should consider management entrenchment. The ability of
directors to make a by-law or board policy immediately effective can be abusive
to shareholder rights and the capital markets for two reasons. First, because an
advance notice provision implemented through a by-law or board policy is effective
immediately, directors can use an advance notice provision regardless of whether
the directors believe a majority of shareholders would support them over alterna-
tive nominees. Consequently, where directors suspect that they will not be re-elect-
ed, they may adopt an advance notice provision in an attempt to prolong their
tenure. Second, a vote to approve an advance notice provision can take place
after the vote to elect directors, as occurred in Mundoro. In such a case, even if
shareholders were to reject the provision, a dissident would have been unable to
nominate a director from the floor-the vote to elect directors would have already
taken place.
289
While Mundoro implies that holding a shareholder vote makes an advance
notice provision more likely to be enforceable,
290
it does not state that the provision
in question would have been ineffective if the directors had not put it to a share-
holder vote. Nevertheless, if directors implement an advance notice provision by
using a board policy without a shareholder vote, securities regulators should find
that the provision was adopted to entrench the directors.
In addition to how the board implemented an advance notice provision, regu-
lators should also consider when the board implemented the provision, and the
board's behaviour around this time. As in Mundoro, where a board uses either
a board policy or by-law to implement an advance notice provision after the
cut-off date, the directors' actions prima facie suggest management entrenchment.
Further, where the circumstances evince possible stalling tactics, such as those in
Maudore, a regulator should be alert to other indicia of entrenchment.
Where a board implements an advance notice provision through an amend-
ment to the articles, securities regulators should be less concerned about manage-
ment entrenchment. This is because amendments to the articles are not effective
until approved by shareholders through special resolution.
291
However, securities
regulators may still consider whether the window of opportunity to nominate direc-
287 Re Neo Material Technologies Inc (2009), 32 OSCB 6941 at 6958, 63 BLR (4th) 123.
288 1153298 Alberta, supra note 257 at paras 83-85.
289 See e.g., Thomson & Shishler, supra note 160.
291 CBCA, supra note 10, s 173(1)(c) (a special resolution is defined in section 2(1) to mean a resolu-
tion passed by a majority of not less than two-thirds of voting shareholders).
SPRING
2013 71
tors operates to entrench existing directors. A commission should consider the
presence of entrenchment where the provision permits a short window of oppor-
tunity for nomination. As illustrated by the CP Rail saga, dissident shareholders
can benefit substantially from running a long public campaign. Regulators should
consider whether the directors have any justification other than entrenchment for
restricting nominations before some specified date.
In considering whether the board is attempting to entrench itself, securities
regulators should consider similar factors as in the oppression context. First, if the
corporation uses slate voting, the advance notice provision may have an entrench-
ing effect. Second, non-cumulative voting may suggest entrenchment if it makes
it less likely that the minority shareholders can influence the determination of
directors. Third, if the corporation has a large number of shareholders, securities
regulators should consider whether the window of opportunity has an entrenching
effect by making the election of a dissident's nominee unlikely.
(ii) Harm to Shareholders' Fundamental Rights
Re Canadian Jorex Ltd suggests that securities regulators should be alert to any
actions of directors that override fundamental rights of shareholders.
2 92
In particu
lar, Jorex suggests that the public interest lies in prohibiting directors from unduly
hindering the fundamental rights of share ownership.
293
In Re HudBay Minerals
Inc
294
the OSC stated that "[t]he right of shareholders to vote on and determine
the make-up of the board is a fundamental governance right".
295
Further, because
"[c]apital markets depend on the rules that corporate law establishes for deter-
mining how investors realize returns",
29 6
the value of shares may diminish if direc-
tors override the rights of shareholders, as investors may begin to question the
certainty of the basic assumptions on which they make investment decisions. As
stated in Part VI, under corporate law, a fundamental right of shareholders is
to select the directors of a company.
297
Because corporate law makes directors
responsible for managing the corporation,
298
shareholders that are dissatisfied
with management can do little more than sell their shares, or attempt to replace
the directors to express their dissatisfaction. When a shareholder no longer has
the ability to attempt to replace the directors, the shareholder's only option is to
sell its shares. From a public interest perspective, this is particularly troublesome
because shareholders generally only consider replacing directors when the shares
292 See Jorex, supra note 263.
293 Ibid.
294 (2009), 32 OSCB 3733, 58 BLR (4th) 249 [cited to OSCB].
295 Ibid at 3762 [emphasis added].
296 Puri et al, supra note 25 at 196.
297 See e.g., Paulson, supra note 205 at 201-02.
VOL 71 2) 72
have been performing poorly. Directors' use of a board policy or by-law to imple-
ment an advance notice provision after the cut-off date, as in Mundoro, or their
use of stalling tactics, as in Maudore, should be seen as stripping shareholders of
their fundamental right to nominate and elect directors. The commission should
consider making orders in the public interest to prevent actions that effectively
destroy the ability of a shareholder to nominate a director.
Further, to the extent that slate voting and the start and end date of the window
of opportunity decrease the chance that shareholders will vote for the dissident's
slate, the slate voting system may be detrimental to the dissident's fundamental
rights. In addition, if the corporation has a large number of shareholders, secur-
ities regulators should consider whether the start and end date of the window of
opportunity defeats the fundamental rights of shareholders by making it difficult
for the dissident to communicate with the shareholders. Moreover, because infor-
mation is important to shareholders' ability to knowledgeably elect directors,
299
if
more than one dissident is proposing nominations or a slate, then the window of
opportunity should provide shareholders with enough time to digest the informa-
tion and make an informed decision.
(iii) Shareholder Vote Should not be Determinative
Court approval of advance notice provisions, such as in Maudore and Mundoro,
should not solely determine whether these provisions, or directors' actions with
respect to these provisions, are in the public interest. In Re Banks,
300
the OSC
stated the following:
[L]n exercising our public interest jurisdiction concerning corporate gov-
ernance, we must go beyond considering whether the respondent com-
plied with the duty of care, diligence and skill set out in the OBCA.
3 0
The OSC emphasized that it is obligated to "determine whether the conduct of
the respondent was contrary to the public interest".
3 0 2
Further, in considering the
OSC's decision in Re Magna International Inc,
303
Professor Anita Anand suggests
that "securities regulation places a layer of regulatory considerations over and
above the contract that shareholders have entered into with the corporation".
304
She suggests that "[t]hese considerations include the concept of public interest,
which has traditionally meant more than the reasonable expectations of sharehold-
299 Puri et al, supra note 25 at 190-91.
300 (2003), 26 OSCB 3377, 34 BLR (3d) 292 [Banks cited to OSCB], var'd on other grounds, Banks
v Ontario (Securities Commission) (2005), 204 OAC 290, 143 ACWS (3d) 1022 (Sup Ct J (Div Ct)).
301 Banks, supra note 300 at 3384.
302 Ibid.
303 (2011), 34 OSCB 1290, 78 BLR (4th) 94.
304 Anita Anand, "Was Magna in the Public Interest?" (2011) 49:2 Osgoode Hall LJ 311 at 324.
SPRING
2013 73
ers".30 As a result, the fact that a court upholds an advance notice provision under
corporate law should not preclude a securities regulator from considering whether
the provision is contrary to the public interest.
Given the ability of directors to adopt advance notice provisions with or
without prior shareholder approval, securities regulators should look to the law
on shareholder approval in the poison pill context to inform their consideration of
whether advance notice provisions are contrary to the public interest. For example,
in Re Cara Operations Ltd,
3 06
the OSC stated the following with respect to direc-
tors' use of poison pills, with the statement being equally applicable to advance
notice provisions:
If a [notice provision] does not have shareholder approval, it general-
ly will be suspect as not being in the best interest of the shareholders;
however, shareholder approval of itself will not establish that a [notice
provision] is in the best interest of the shareholders.
3 07
In addition, securities regulators should be cautious about conflating share-
holder approval with the public interest. Because by-law amendments and board
policies are effective immediately, the ability of shareholders to vote on the provi-
sion does not negate the damage done to shareholders or capital markets prior
to the shareholder vote to approve the provision. As a result, since the public
interest is remedial and preventative,
308
securities regulators should not wait to act
until shareholders vote on the provision when the circumstances suggest abuse of
shareholders and capital markets based on indicia such as entrenchment or harm
to shareholders' fundamental rights.
VIII CONCLUSION
Advance notice provisions can benefit shareholders by properly informing them of
alternative director nominations. However, where directors implement an advance
notice provision through a by-law or board policy with immediate effect after the
cut-off date, or implement a provision several days before the cut-off date and
stall the dissident in complying with the provision, shareholders will be effective-
ly precluded from nominating directors at the forthcoming meeting. In addition,
where the provision prevents nominations prior to a specified date, dissidents may
be disadvantaged relative to incumbent directors because of the benefit of long
public campaigns and first mover advantages. Provisions that restrict nomination
305 Ibid.
306 (2002), 25 OSCB 7997.
307 Ibid at 8003 (to illustrate the applicability of the quoted passage to advance notice provisions,
the term "plan"-which the OSC used to discuss the poison pill-has been replaced with "notice provi-
sion").
308 See e.g., Mithras, supra note 234 at 1610-11.
VOL 71 (2)
74
prior to a specified date may also indirectly encourage full-blown battles for control
by creating a disincentive for dissidents to negotiate in advance of the window of
opportunity.
Consequently, directors' use of advance notice provisions could give rise to a
court order under the oppression remedy. Depending on the circumstances, the
actions of directors and the terms of the provisions may breach the reasonable
expectations of dissident shareholders. Further, where directors use the provi-
sions in a manner that precludes shareholders from making nominations outright
or reduces the chance of shareholders successfully replacing incumbent manage-
ment, their actions are at least unfairly prejudicial, and potentially oppressive, to
shareholders.
Regardless of whether corporate law applies, securities regulators should
consider whether advance notice provisions and their manner of adoption are
contrary to the public interest. Where the terms of an advance notice provision or
its manner of adoption suggests entrenchment or a violation of the fundamental
rights of shareholders, the provision will be abusive of the dissidents and capital
markets in general. Because of the important role of shareholders' ability to select
management, investors may lose confidence in the capital markets if securities
regulators leave shareholders' fundamental rights unprotected. To prevent possible
abuse, securities regulators should not blindly rely on the fact that advance notice
provisions may eventually be approved by shareholder votes. These provisions
may be immediately effective, so by the time shareholders have the opportunity
to vote, the provision will have already harmed shareholders and capital markets.
SPRING
2013 75

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