Investors heating up the conversation on climate change

Shareholders are placing increased value on non-financial factors when making investment decisions. Some of these factors are environmental and social issues. In particular, shareholder proposals on climate change have recently gained some traction.

In 2016, a record breaking number of climate change resolutions were filed. This shift in focus is attributed to the 2015 Paris Accord, where 195 nations committed to take measures to mitigate global warming. The accord’s objective was to garner a global response to climate change, and it succeeded in enlisting a pledge from these nations to limit temperature increases to well below 2 degrees Celsius.

Interestingly, this year, there have been 3 climate change shareholder proposals that were passed during the 2017 proxy season in the United States despite boards’ recommendations to vote against these proposals. The boards argued that the information was already included in other reports, that there were strategies already in place addressing the risks of a lower carbon economy, and that there are no regulatory requirements developed at this time. The passing of the shareholder proposals is a bold step, which reflects shareholders’ interest in companies’ actions to meet the Paris Accord commitment.

Today’s investors are taking proactive steps to ensure the long term viability of their investments rather than reacting to regulatory changes. An asset management firm boldly asserted: “[a]s a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite—when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations”. This signals to companies whose assets and businesses are subject to climate change risk to take a more proactive approach to address climate concerns.

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The author would like to thank Maha Mansour, Summer Student, for her assistance in preparing this legal update.

Alberta Securities Commission declines to exercise public interest jurisdiction to terminate soliciting dealer arrangement in proxy fight

In its recent PointNorth Capital Inc. decision, the Alberta Securities Commission (ASC) was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into by the issuer, Liquor Stores N.A. Ltd., in the context of a proxy fight. The arrangement was intended to address management’s constrained ability to solicit proxies due to the fact that many of the shareholders were “objecting beneficial owners” who could only be contacted indirectly through brokers.

The ASC dismissed the application by dissident shareholders of Liquor Stores, the PointNorth limited partnerships, for orders requiring Liquor Stores to terminate the arrangement, which involved payment to a group of IIROC member dealers to solicit shareholder votes in favour of the incumbent slate of directors at an upcoming shareholders meeting.

Pursuant to the arrangement, Liquor Stores agreed (1) to pay a Dealer Manager a work fee of $100,000 for services rendered in connection with the formation and management of a Soliciting Dealer Group, and (2) a solicitation fee of $0.05 per common share to any member of the Soliciting Dealer Group that facilitated the valid voting by a retail beneficial shareholder of his or her shares in support of each member of the Liquor Store’s slate of directors, to a maximum of $1,500 per beneficial shareholder.

Conceding that the arrangement was not specifically prohibited under Alberta securities laws, the PointNorth applicants asked the ASC to exercise its general “public interest jurisdiction” under s. 198(1) of the Alberta Securities Act to make the orders requested.

The Commission declined to do so, concluding that the Plan was not “clearly abusive” of Liquor Stores’ shareholders or the capital markets in general. In particular, there was no evidence that anyone was actually harmed by the arrangement. In the absence of evidence, the Commission refused to assume that members of the dealer group would violate their legal and ethical duties to their clients for the possibility of earning $.05 per share voted in a particular manner, or that members of the board of Liquor Stores would improperly use corporate funds to put their interests ahead of their fiduciary duties.

Following the decision of the Ontario Securities Commission in Re Canadian Tire Corp. and decisions of the ASC in Re Perpetual Energy Inc. and Re ARC Equity Management (Fund 4) Ltd., the ASC affirmed that in the absence of a breach of securities law, its public interest jurisdiction should only be exercised to address a clearly demonstrated abuse of investors and the integrity of the capital markets.

It rejected the PointNorth applicants’ submission that a standard lower than that of “clearly abusive” ought to apply, given that Alberta securities law was silent on the propriety of such soliciting arrangements. Alberta securities laws set out comprehensive and detailed requirements for proxy solicitation and the conduct of brokers, and did not proscribe soliciting dealer arrangements. In the circumstances, it would create considerable uncertainty if the Commission was to base its decision on a standard lower than that of “clearly abusive”.

The ASC’s approval of the soliciting arrangement in issue provides a useful precedent for proxy contests in Canada. Its comments about the circumstances in which it will exercise its public interest power in the absence of a breach of securities law or evidence of demonstrable harm indicate that it will continue to exercise restraint and avoid use of that jurisdiction to impose new policy requirements on market participants.

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This commentary was originally posted on Norton Rose Fulbright’s Securities Litigation and Enforcement Blog.

The authors would like to thank Milomir Strbac, Summer Student, for his contribution to this article.

Social media: shareholder activism in 140 characters or less

Social media has changed how we live. We have access to extensive information and global connections at our finger tips.  Given its already well-established presence in our personal lives, it comes as no surprise that social media has become a popular platform for campaigning activists.  In fact, 2017 marks one decade since an individual shareholder of a web service provider voiced his disagreement with the company’s business strategy on YouTube. The videos ultimately resulted in the replacement of the company’s chief executive and opened the floodgates for activist shareholders.

Twitter has been the platform of choice for a famous American activist shareholder. Seth Oranburg, a Professor of Law at Duquesne University, in an article titled “How Twitter is Disrupting Shareholder Activism”, hypothesized that the 140 character limit on tweets offers activists a preferential mode of persuasion: shareholders who would not otherwise read a proxy statement spanning hundreds of pages might respond to a short tweet.

The Edinburgh Centre for Commercial Law Blog reported that activists have also launched websites – such as MoxyVote (now defunct) and Carl Icahn’s Shareholders’ Square Table – to provide online spaces for shareholders to lobby and discuss changes to corporate governance.  The power of these platforms was evidenced in 2009 when shareholders used MoxyVote to reject a takeover bid, forcing the bidder to improve its offer by nearly 25%.

Social media is not just a tool for activists or dissidents. A recent Edelman article suggested companies incorporate social media into their defence strategies before activist shareholders can control the narrative:

  1. Use social media platforms to help tell a story. Multimedia content, such as blog posts and visual content, can help executives tell their shareholders a more compelling story. Videos, in particular, can be entertaining and do not demand much effort on the investor’s behalf.
  2. Target audiences with paid ads. Companies can use paid ads to reach out to investors and to ensure their stories are prioritized in search results.
  3. Use a cross-channel social media strategy. Companies can use social media to push out their own narratives and to direct traffic back to company websites built to counter activists.
  4. Establish a platform to respond to shareholders. Deploying “microsites” that deal with specific issues during contests allows companies to share more of their own content with investors and media while simultaneously providing a medium for companies to respond to dissident actions.

Social media is trending in 2017. Both activists and companies can leverage the power of real time information distribution to stimulate and also to ward off change.  Issuers should be aware of the risk involved in using social media which may result in the market place receiving misleading and unbalanced information.  The Canadian Securities Administrators have published a notice that tells issuers to be aware of disclosure obligations that may be triggered when using social media as a channel to communicate with investors.  Character limits welcome unbalanced, selective and misleading disclosure, which may cause concern under securities laws.

Please do not hesitate to contact Norton Rose Fulbright lawyers for assistance with your social media campaign.

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The author would like to thank Elana Friedman, Summer Student, for her assistance in preparing this legal update.

How independent are independent directors?

Board independence is a pillar of good corporate governance. It ensures that a corporation’s management is properly monitored and that the corporation’s decisions effectively balance the various stakeholders’ interests. Over the past decades, Canadian regulators (with support from investors) have required companies to increase the number of independent directors on their boards and have created stricter requirements for what qualifies as ‘independent’. But are independent directors now truly independent?

In a US paper published by Kastiel and Nili, the authors argued that independent directors today, while technically independent, are functionally still very dependent on management. This is because of the directors’ “informational capture” – lacking the time, adequate resources, and specific knowledge to properly obtain, digest, and analyze extensive and complex information that modern boards evaluate. This informational gap often causes independent directors to rely on the information management provides, or conceals, and the way that information is provided.

The authors outline four reasons for this informational capture:

  1. outside directors usually lack direct access to company information, and thus rely heavily on management as their source of information;
  2. outside directors are often exposed to voluminous information, but lack the resources to properly analyze it all in a timely fashion;
  3. while outside directors have general business skills, most of them lack relevant company or industry-specific knowledge, which often takes a few years of board membership to properly acquire; and
  4. lack of information often facilitates other behavioural biases, such as groupthink, which then further solidifies the directors’ reliance on management for information.

The rise of super directors

To address this issue, some activist shareholders have been pushing for what the authors call “super directors”—activist-nominated directors who have the full resources, and analytic strength, of the (often institutional) investors that nominated them. Such institutional support allows super directors to collect, analyze, and edit voluminous information in a timely fashion, and share their results with the rest of the board, who now have a new source of information.

Super directors, however, are only a temporary solution to the problem. First, most companies are not targeted by activist investors, and thus don’t benefit from such directors. Even when they do, super directors are only there for a few years, and don’t leave behind any organizational knowledge for the other directors to rely on once they exit. Additionally, activist directors may be prevented from accessing some of the corporation’s information, or sharing it with their team due to conflicts of interest. Finally, those directors, like their nominating shareholders, may only have short-term plans for the company.

Board suites

For a more effective solution, the authors suggest the creation of a “board suite”—full-time special informational counsel to the board. Such counsel would request, summarize, and prepare information from management, as well as assess the completeness of the information provided. The suite would become the institutional knowledge base of the board, unaffected by the change in directors. Board suites could also take over some of the shareholder engagement tasks, particularly those who are data/information driven. Similarly, it could also help in establishing long-term relationships with key shareholders, and prevent miscommunications since, unlike directors, the suite would be a constant in the board.

The proposed board suite doesn’t come without its own problems – such as increased administrative costs and potential difficulties in its implementation – but it does highlight a serious issue that corporations and shareholders alike need to turn their minds to. If good corporate governance is actually to be achieved, management, directors, and shareholders must all work together to ensure that the independent directors are getting, and understanding, all the necessary information to properly make decisions.

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The author would like to thank Ahmed Labib, summer student, for his assistance in preparing this legal update.

Trends and strategies for companies involved in M&A transactions

In a report entitled “M&A Activism: A Special Report”[1] (the Report), the editor-in-chief of Activist Insight describes the types of companies most at risk of being targeted by shareholder demands, providing steps that can be taken to increase the resilience of M&A transactions.

The Report identifies a number of trends and findings, as summarized below:

  • Deal Prevention: M&A demands from shareholders have increased in recent years in both Canada and the United States, most commonly by activists seeking to prevent deals, to pursue appraisal rights, and to make their own takeover bids. Notably, 45% of Canadian shareholder activism between 2010 and the end of 2016 were intended to prevent deals, compared to 21% in the United States.
  • Target Profiles: The Report provides insight into the types of companies most at risk of being targeted by shareholder demands. Basic materials as well as services and technology companies are most frequently targeted by demands for M&A transactions in both the United States and Canada. Demands are often directed at companies with a market capitalization below $2 billion.
  • Defense Tactics: Steps can be taken to ensure the resilience of M&A transactions proposed by companies. Having a well-defined business strategy and keeping on message with that strategy is a strong defense to any activist attack. Communicating and pursuing voting lock-up agreements with influential shareholders early and frequently are also recommended tactics.
  • Proxy Advisories: The Report emphasizes the important role played by proxy voting agencies in determining ultimate levels of shareholder support or opposition. Proxy voting agencies will often ignore fairness opinions commissioned by sellers where detailed financial analysis is not included in the opinion. Longstanding shareholders may oppose M&A transactions where they believe a stock that they own is not being sold at an optimal price or at the wrong time.
  • Deal Structure: According to the Report, deal structure is important in predicting a transaction’s ultimate success. Activists scrutinize the deal process and boards are held to a high optical standard, meaning a deal cannot appear to be quick or unexpected to shareholders. Consideration should be given to the potential risks and consequences of: (i) dead votes, where shareholders of record sell before voting or before a revised bid is made; (ii) mergers requiring shareholder votes, particularly if the consideration is entirely or partially stock-based; and (iii) deal protections, such as no-shop clauses and termination fees, which can aggravate investors due to the transfer of risk from the buyer to the shareholders’ meeting.

It is important that companies pay attention to their susceptibility to opportunistic M&A demands and to consider strategies to protect themselves adequately. A full copy of the Report can be obtained here.

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The author would like to thank Brandon Burke, summer student, for his assistance in preparing this legal update.

[1] Josh Black, Activist Insight, “M&A Activism: A Special Report” (2017) Harvard Law School Forum on Corporate Governance and Financial Regulation.

Fasten your seatbelts: preparing for the globalization of hedge fund activists

Activist hedge funds have grown up and gone global, reinforcing the need for companies of all shapes and sizes to plan ahead for the possibility of an attack. A recent article by Martin Lipton in the Harvard Law School Forum of Corporate Governance and Financial Regulation reviews recent developments in the activist landscape and reconfirms the importance of preparing for an attack.

The Fight Has Gone Global

One recent development is the expansion of hedge fund activism across the globe within the past two years. Mr. Lipton suggests that activism typically associated with the American marketplace is quickly gaining traction abroad. According to the Activist Investing Annual Review 2017, a total of 758 companies worldwide received public shareholder demands in 2016, a 13% increase on 2015’s total of 673.

The growth of activist hedge funds in Europe and Asia have, in a large way, contributed to this worldwide increase. 97 European companies faced public activist demands in 2016, up from 72 in 2015, and predictions for 2017 suggest this number will continue to grow. The result of the Brexit referendum, far from scaring investors away, seemed to unlock potential for investors – both the UK and continental Europe experienced an increased presence of American hedge funds and institutional investors. US hedge fund investments in Europe are up 20% in 2017 as of July 4th and many funds will be looking into activist opportunities to boost the return on their investment.

Activism in Asia, on the other hand, has tended to take a slightly different form than that in North America, with the investment community favouring behind-the-scenes negotiations over public demands. Despite this, hedge fund activism in Asia is still experiencing major growth, rising from 52 public activist demands in 2015 to 77 in 2016. Japan, in particular, has opened its doors to shareholder and hedge fund activism, as part of Prime Minister Shinzo Abe’s plan to revitalize the country’s economy, and many activists are waiting to sink their teeth into these previously non-activist-friendly markets.

The growth in Europe and Asia is balancing out the relative stabilization in North America and Australia, with Canada experiencing a slowdown of companies facing public activist demands: 49 in 2016, down from 60 in 2015. However, far from taking this as a sign for Canadian companies to kick their feet up, Mr. Lipton argues that this global trend indicates that no company, no matter its size, success, popularity or location, should believe they are safe from a potential attack from activists.

Stay Prepared

In a previous post, we outlined some strategies for defending against an activist attack.  The key to a successful defence lies in advance preparation, including maintaining and strengthening shareholder relations, preparing the board for an activist attack, and monitoring market activity and attack indicators. With the strength of activist hedge funds growing worldwide, it is important now, more than ever, for companies to brace themselves for impact and decide whether to negotiate with activists or gear up for a fight.

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The author would like to thank Abigail Court, Summer Student, for her assistance in preparing this legal update.

The drivers and consequences of settlement agreements in proxy fights

Activist interventions are being increasingly resolved by way of settlement agreements, with 3% of activist interventions in 2000 having resulted in a settlement agreement versus 16% in 2011.[1] In light of this emerging trend, the Columbia Business School recently published a paper, Dancing with Activists, in which the authors sought to provide the first systematic analysis of the drivers, nature, and consequences of such settlements. The authors identified 4 main drivers of settlement agreements: (1) the activist’s stake; (2) market reaction to a SEC Schedule 13(d) filing; (3) settlements in past engagements; and (4) past firm performance.

It is of note that in reaching their conclusions, the authors only reviewed activist intervention in the United States.

The Activist’s Stake

When the activist has a larger stake in the company, it is more likely that a settlement will result. A higher stake provides a signal of the activist’s confidence that it would be able to increase the target firm’s value. A large activist stake also means that the activist has more votes and therefore has more leverage in reaching a settlement because they pose a more credible threat to ousting the incumbents. The authors found that when the activist’s stake is above the median (6.4%), the probability of a settlement increases by about 4-5%.

Market Reaction to 13(d) Filing

An activist holding a stake in a U.S. target is required to file a SEC Schedule 13(d) upon acquiring more than 5% of any class of securities of a public company if they have an interest in controlling the management of the company. The market reaction to this filing will affect the likelihood of a settlement. A favourable market reaction signals the market’s approval of the activism campaign, thereby increasing the activist’s bargaining power.

Settlements in Past Engagements

Activists with a track record of obtaining settlements in past contests are associated with an increased likelihood of a settlement. This track record is likely a result of having high credibility to win proxy contests, therefore providing the activist with better chances of reaching a settlement in the future. The authors found that each past settlement adds about 3% to the probability of reaching a settlement in the current campaign.

Past Firm Performance

If the target firm has poor past performance, a settlement is more likely to take place. Again, this relates to the bargaining power of the target. The activist is more likely to gain approval from other voters if they are dissatisfied with the management of the target. This bolsters the activist’s credibility in succeeding and therefore leads to an increased likelihood of settlements.

Nature of Settlements – Incomplete Contracting

Hedge fund activist investors want to effect operational changes to the target company or require an increase in shareholder payouts. Despite this, many of the settlement agreements do not contract for these large scale changes and agreements are mostly restricted to boardroom turnover. Postponement of the operational changes allows the incumbent directors to save face – the immediate firing of a CEO, whom the incumbents had been previously supporting, may be publicly viewed as “throwing the CEO under the bus”. Instead, settlements often result in the appointment of a number of activist-affiliated directors to the board who then join the independent incumbent directors. The open-minded board can be persuaded by the activist’s directors thereby allowing for greater changes downstream without the immediate costs of taking the conflict to a contested election.

[1] See Dancing with Activists, Table 1 at Page 46.

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The author would like to thank William Chalmers, Summer Student, for his assistance in preparing this legal update.

The CCGG’s stewardship principles

Last month, the Canadian Coalition for Good Governance (CCGG) published its new Stewardship Principles paper designed to assist institutional investors fulfil their responsibilities to their beneficiaries or clients and enhance the value of their investments. The principles reflect what the CCGG believes are appropriate stewardship responsibilities for institutions investing in Canadian public equities and are directed to both asset owners and asset managers. While it is not the institutional investor’s role to manage the public companies in which it invests, in order to fulfil its role as fiduciary to its beneficiaries and clients, the CCGG believes an institutional investor has a responsibility to exercise voting rights, monitor board oversight and engage with companies on matters that might have an impact on the company’s value. The CCGG intends that the principles be used as a guide only, acknowledging that how the principles are implemented will depend on the nature of the institutional investor’s business model and relationship with its beneficiaries or clients. Below is a summary of the principles:

Principle 1 – Develop an approach to stewardship

It is advised that institutional investors integrate stewardship into its regular investing process, which may include providing a procedure for voting proxies, engaging with companies, reporting to beneficiaries or clients, managing potential conflicts of interest, aligning compensation with stewardship principles and outsourcing stewardship responsibilities. This should be supplemented by disclosure of the stewardship plan to clients and beneficiaries. Disclosing the plan creates accountability and can include reporting results and progress and explaining to clients and beneficiaries how following the stewardship plan leads to enhanced value.

Principle 2 – Monitor companies

It is recommended that institutional investors monitor the companies in which they invest in so as to mitigate risk and enhance value. Monitoring can take a variety of forms, including, reviewing public disclosures, engaging with portfolio companies, obtaining third party research or analysis and sharing research and information with other investors or investor groups.

Principle 3 – Report on voting activities

Institutional investors should adopt and periodically report to beneficiaries and clients their proxy voting guidelines and how voting rights are exercised. Voting decisions should be informed, independent, in line with the institutional investor’s voting policies and ultimately in the best interests of beneficiaries or clients. This may require that institutional investors obtain advice from proxy advisors, which advice should be assessed rigorously.

Principle 4 – Engage with companies

Thoughtful engagement with portfolio companies is strongly encouraged to discuss investor concerns. Institutional investors should consider how and when to escalate engagement activities if a board is unresponsive to any concerns expressed. There is a range of escalation activities that could be undertaken when a concern is not sufficiently addressed, including, speaking at shareholder meetings, making public statements, voting against or withholding votes from directors or requisitioning a special shareholders meeting to address specific concerns.

Principle 5 – Collaborate with other institutional investors

Collaboration is viewed by the CCGG as beneficial to both investors and the companies they invest in as it allows for the globalization of good governance practices and provides a greater understanding of the various viewpoints at play.

Principle 6 – Work with policy makers

It is advised that institutional investors engage with regulators and other policy makers where appropriate, to ensure that the shareholder perspective is considered when new laws and policies are being developed.

Principle 7 – Focus on long-term sustainable value

Institutional investors should focus on a company’s long-term success and sustainable value creation rather than short term considerations. To achieve this, institutional investors should develop an understanding of each portfolio company’s strategy and understand the risks and opportunities associated with the economic, political, social and regulatory environment.

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The author would like to thank Travis Bertrand, Summer Student, for his assistance in preparing this legal update.

Members of Special Situations team weigh in on Canadian activism in Ethical Boardroom Magazine

Members of Norton Rose Fulbright’s Canadian Special Situations team have weighed in on shareholder activism in Canada with an article in the Spring Edition of Ethical Boardroom Magazine. The article, written by Trevor Zeyl (assisted by Joe Bricker), offers insights on shareholder activism in Canada in the past year, and some predictions for 2017 and beyond. The Spring Edition of Ethical Boardroom can be viewed here (free subscription required):

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Court dismisses petition for a court-ordered shareholders meeting with independent chair in lieu of a meeting requisitioned by shareholders

In a dispute between three petitioning directors (the Petitioners) and three requisitioning shareholders (two of whom were also directors) (the Requisitioning Shareholders) of Photon Control Inc. (Photon) (TSX-V: PHO), the Petitioners asked the British Columbia Supreme Court (the Court) to exercise its powers under the Business Corporations Act (British Columbia) (the Act) to intervene in the calling, holding and conduct of a shareholders’ meeting that the Requisitioning Shareholders had requisitioned under the Act. The Court dismissed the petition. In addition, the Court also ruled that the chair of the requisitioned meeting did not have to be independent and could be one of the Requisitioning Shareholders, even if that shareholder was also a director of Photon and the business of the meeting involved the removal and election of directors.


The Court in Goldstein v. McGrath[1] stated that a court’s power to call a general meeting of shareholders under section 186 of the Act should only be exercised in extraordinary circumstances. In this case, the Requisitioning Shareholders requisitioned the Board under the Act to call a general meeting of shareholders in order to, among other things, remove the Petitioners and elect two new directors to the Board. The Board was deadlocked at the time and was not able to call the meeting within the time required under the Act. As a result, the Requisitioning Shareholders called the meeting by issuing a notice of general meeting to shareholders of Photon under the requisitioning provisions of the Act. The Petitioners petitioned the Court to order a combined annual general meeting and requisitioned meeting of shareholders, and further asked the Court put conditions on the meeting and the parties, including a requirement for an independent chair (as opposed to one of the Requisitioning Shareholders who would be entitled to chair the meeting under Photon’s articles).

Court’s power to order a shareholders’ meeting should only be exercised in extraordinary circumstances

The Court explained that it should only exercise its discretionary powers to order a meeting of shareholders under the Act in extraordinary circumstances, including if it is impracticable for the company to call or conduct the meeting or if the company fails to hold the meeting of shareholders in accordance with the Act or the company’s organizational documents.

The Court then ruled that a deadlocked Board was not enough to warrant calling the meeting. To the contrary, the court stated that it was practical for the Requisitioning Shareholder to call the requisitioned meeting, as it followed the clear statutory process available to shareholders under the Act, and the Petitioners could not rely merely on their own unwillingness to call that meeting as a reason to petition the Court to intervene.

Chair of requisitioned meeting does not need to be independent of the requisitioning shareholders

The Petitioners also claimed that the chair of the meeting should not be one of the Requisitioning Shareholders, and should be someone independent. The Court explained that in order for it to make such a ruling, it must be shown that the chair proposed by the Requisitioning Shareholders has demonstrated a capacity for potential impropriety at the meeting, and absent such evidence there is no basis for the Court to intervene.

Importantly, the Court ruled that even if there was an apprehension of bias of the proposed chair and the proposed chair was a director of the company and one of the Requisitioning Shareholders, this still would not warrant the Court’s appointment of an independent chair for the meeting. The Court explained that an existing director will always have an interest in the outcome of a meeting in which his or her election is to be considered, and that alone is not sufficient to demonstrate the potential impropriety of the director acting as chair of the meeting or to order that an independent chair be appointed instead.

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[1] 2017 BCSC 586.