Cha-Cha Changes: Shareholders’ New Groove
Ordinary Resolutions Signed by a Majority of Shareholders Can Now be Passed Outside of a Shareholders’ Meeting
Changes in Canadian corporate law have empowered shareholders, particularly in scenarios involving a controlling shareholder, to make attempts to remove and appoint directors by ordinary resolution, sidestepping the traditional forum of shareholder meetings.
Two cases dealing with written resolutions in lieu of meetings are considered in this article, both which underscore the use of written resolutions as a mechanism to remove and appoint corporate directors. These cases highlight the evolving application and legal considerations of written resolutions in corporate governance.
This discussion also explores some considerations both founders and equity investors should turn their minds to in the context of shareholders’ resolutions in lieu of meetings. While this change may hold less immediate significance for independent directors and executives, it remains important for them to remember that their positions are ultimately contingent on shareholder approval.
By-Laws and Shareholder Agreements in Focus: Advice for Founders and Investors
With this change to corporate practice, founders should consider their approach to ordinary resolutions during incorporation and whether they will permit the process described in their governing act or, instead, if they will necessitate meetings or a higher voting threshold. Equity investors should exercise caution and due diligence in reviewing a corporation’s by-laws and any unanimous shareholders’ agreement (USA) and should be well-versed in the mechanisms the corporation intends to follow for passing ordinary resolutions.
A founder contemplating the transition from majority to minority ownership may want to plan around the nuances of written resolutions in lieu of a meeting, ensuring that their articles and USA include safeguards that can protect against shifts in corporate control, thereby securing continuing influence or at least a consultative role for founders in key corporate decisions. Some examples include:
Advance Notice By-Laws: Mandating notification for director nominations and other significant motions to ensure informed decision-making.
Reserved Board Seats and Appointments: Allocating specific board positions for minority shareholders or specific roles to ensure diverse representation and expertise.
Specific Consent Requirements: Defining scenarios that require consent from certain shareholders or a higher threshold of approval, enhancing protection against unilateral decisions.
Supermajority Provisions for Certain Decisions.
Olson v. River Green (Thunder Bay) et al.: Director Removal Failed due to OBCA Notice Requirements
Under the Ontario, Alberta and federal acts, when activist shareholders propose the removal of a director without a meeting, they must ensure the director receives proper notice of his or her removal. Under these acts, there is an express exception to the ability of all shareholders in public corporations, and a majority of shareholders in private corporations, to pass resolutions in writing where there has been a written statement provided by a director regarding their removal.
In this context, “notice” refers to a formal communication given to a director, informing him or her about the shareholder resolution intended to remove them from their position.
Olson v River Green (Thunder Bay) et al. (“Olson”)[i] was decided in 2022, just after the Ontario Business Corporation Act (“OBCA”) was amended. The court considered the removal of a director by ordinary shareholder resolution outside of a meeting where notice was not provided to the impugned director, thereby contravening notice requirements in the OBCA. Olson, the plaintiff and a director of the company, challenged his removal. The court confirmed that the OBCA requires that directors be promptly informed and given a chance to respond in writing when facing removal or resignation[ii] and that the OBCA empowers a director to issue a formal written statement to shareholders outlining his or her reasons for resignation or contesting the proposed dismissal.
The court found in the director’s favour, invalidating the shareholder resolutions that led to his ousting and reinstating him as a director. The decision highlights the importance of adhering to the OBCA’s notice and procedural requirements, emphasizing that the ability to pass resolutions without a meeting does not eliminate the need to notify directors about shareholder meetings or provide them with the opportunity to express objections to proposed decisions.[iii]
The Delicate Dance of Removing a Director Without a Meeting
Once a director has received notice of their potential removal and has relayed their written statement to the shareholders opposing their removal, the OBCA is unclear if an ordinary resolution can be adopted without holding a shareholders’ meeting. While some lawyers may advise activists to hold a shareholders' meeting to address board changes, such advice may not fully appreciate the strategic complexities involved.
The strategic element to be considered is that shareholders cannot themselves call a shareholder meeting unless they have requisitioned one and the board has failed to call it within the applicable timeframe. Such procedural intricacies can allow for delay tactics or technical dismissals to be employed by management. In light of amendments that might enable a swifter action through written resolutions, the allure of bypassing a shareholders meeting, despite its uncertain legal standing, becomes evident.
This legal grey area, however, should not be navigated without consideration. The potential rejection by a court of a written resolution highlights an element of litigation strategy. Rather than an outright recommendation to default to shareholder meetings, this scenario underscores the importance of weighing the risks and benefits of pursuing a written resolution as a strategic choice.
For activists, particularly those with substantial resources, the prospect of leveraging a written resolution and seeking approval from the bench, emerges as a tactical maneuver. This path, while fraught with the risk of legal challenges, may offer an alternative to the protracted and potentially manipulated process of organizing a shareholders’ meeting.
In British Columbia, the process for removing a director outside of a meeting is more straightforward, thanks to a 2021 court ruling. This decision clarified that the term 'meeting' does not strictly require an actual meeting of shareholders, provided specific conditions are met and confirms that under the British Columbia Business Corporations Act (“BCBCA”), directors can be removed by ordinary resolution without the need for a meeting.[iv]
Rogers v. Rogers Communications Inc.: Controlling Shareholder Succeeded in Removing Directors
Rogers v. Rogers Communications Inc. (“Rogers“)[v] is a 2021 case about the use of a written resolution in lieu of a meeting in the context of infighting amongst shareholders over the board’s officer appointments. The case includes some nuances that are only applicable in British Columbia, due to the BCBCA not including directors’ notice rights. The case is also noteworthy due to the immense publicity it received at the time and that it continues to receive.
Facts and Background
In the midst of the $26 billion acquisition of Shaw Communications Inc., Edward Rogers, chairman of the Rogers Control Trust — which holds 97.5% of Class A voting shares in Rogers Communications Inc. — proposed a leadership change, setting off internal disputes within the trust’s beneficiaries, the Rogers family.[vi]
In his capacity as trust chairman, Edward Rogers passed an ordinary shareholders’ resolution without a shareholders’ meeting to restructure the board, replacing five directors. This move subverted historical company protocol and escalated into a public dispute as board members and legal advisors contested the resolution’s validity.[vii]
Despite advisories of potential liabilities, Edward Rogers held a board meeting where he was appointed chair.[viii] The newly formed board’s legitimacy was publicly asserted, though met with resistance from those supporting the former CEO.[ix] The legal proceedings that followed revolved around the appropriateness of using written resolutions, as permitted by the BCBCA, for such significant governance changes without a physical meeting.[x]
Rogers set a precedent for the use of written resolutions as a tool in shareholder activism and serves as a reminder that directors serve at the discretion of majority shareholders, underscoring shareholder influence in dictating board composition.
Understanding Jurisdictional Nuances: BC, Ontario, and Federal Legislation
In reviewing Olson and Rogers, a key distinction emerges between the BCBCA and the OBCA regarding director removal. The latter statute requires giving directors notice and an opportunity to submit to the corporation a written statement documenting reasons why they oppose the proposed resolution. This procedural requirement contrasts with British Columbia’s legislation, indicating that in Ontario, Alberta and under the federal statute, directors have the right to object to their removal, which limits a majority shareholder’s ability to remove a director without a formal meeting.
Key Take Aways
Olson and Rogers mark significant moments in shareholder activism and exemplify how, especially in the presence of a controlling shareholder, ordinary resolutions for removing directors can be mobilized by shareholders sidestepping traditional shareholder meeting forums. The cases emphasize the importance of shareholders being conversant with the relevant legal frameworks and corporate articles, especially in the context of activist shareholders who may be able to exercise control over the makeup of a board and ultimately control officer appointments.
Whether you are a shareholder, board member, or investor, please reach out to South Hill Law with any questions you may have about your corporation’s governing act, articles, or any USA and let us help you navigate the complexities of corporate law. Contact us here.
[i] Olson v River Green (Thunder Bay) et al., 2022 ONSC 7039 (CanLII), paras 23-25, para 28.
[ii] Ibid, paras 30-33.
[iii] Supra i.
[iv] Rogers v Rogers Communications Inc. 2021 BCSC 2184 (CanLII), para 177.
[v] Ibid.
[vi] Ibid, para 34.
[vii] Ibid, paras 44-49.
[viii] Ibid, para 70.
[ix] Ibid, paras 69-72.
[x] Ibid, para 237.