In a contest for shareholder support, control of the narrative is crucial, and the difference in perception between a board acting decisively to protect shareholders’ investments, and a board willing to do or say anything to hold onto control, can be one of timing. A board that acts proactively, supported by expert advice and a cogent rationale, invites the conclusion that it has exercised its judgment in the best interests of the company, but a board that acts defensively in reaction to a dissident risks the inference that its decisions are influenced by the directors’ desire to keep their jobs.
This dichotomy is evident in two Ontario decisions in the last year, which have confirmed that directors have wide latitude to manage corporate affairs, but the courts will intervene where directors have manipulated dates or transactions to block a dissident challenge.
In Wells v. Bioniche Life Sciences Inc., after receiving a defective requisition, the directors acted promptly to fix a date for the company’s Annual General Meeting. The Court upheld the date chosen, which was some seven months away, as a reasonable exercise of business judgment by the board, and did not require the company to hold the second, earlier meeting sought by the dissident.
The confirmation of the directors’ power to manage the affairs of the corporation in the face of a proxy dispute is welcome. A dissident’s leverage should come from proposing a superior vision and plan for the company, not from its ability to impose costs on the company by disrupting management and corporate processes. The protection of the board’s business judgment supports this objective.
The second decision demonstrates that the Court will not defer to the directors business judgment when they have manipulated corporate processes specifically to defeat a dissident. In Concept Capital Management Ltd. v. Oremex Silver Inc. the directors’ scheduling and rescheduling of the meeting were upheld; however, the company closed a major private placement on the record date. While accepting that the transaction was in the best interests of the corporation, the Court found that the closing arrangements were unusual and concluded that the timing had been arranged in order to place a large number of shares into friendly hands, and the Court amended the record date to prevent the newly issued shares from being voted at the meeting. On the ensuing vote, the management slate was soundly defeated.
These decisions demonstrate that the early stages of the campaign are crucial for both sides. Directors who anticipate a proxy contest should be proactive in setting a meeting date to address shareholder concerns and/or pursuing transactions to improve the corporation’s position, as once a dissident emerges, the directors’ room to maneuver may be reduced. Conversely, for the dissident, early decisive action is critical to set the terrain and force the company to engage with shareholders’ concerns on the dissident’s terms and timetable.