( Disponible en anglais seulement )
Despite the effort that Canadian companies make to properly identify, vet, and educate director nominees, for most of these companies, unknown, unproven and, at times, undesirable director candidates can be nominated directly from the floor of shareholder meetings – with no advance notice or disclosure to shareholders or management. This article identifies the dangers of this situation and recommends a best practices approach of adopting « advance notice by-laws » to safeguard against them. This article also identifies some immediate solutions directors can take, such as postponing a potentially contentious meeting, or adopting a « directors policy » requiring advance notice of director nominees, if they discover themselves at risk of a stealth proxy fight without such by-laws in place.
Despite Canada’s rigorous public disclosure regime, and despite robust provisions such as the shareholder proposal mechanism, meeting requisition procedures, and other provisions designed to ensure shareholder democracy and sufficient information flow to shareholders to enable them to make an informed decision on matters to be voted on, there is no statutory or common law requirement in Canada that shareholders be given advance information on director nominees that are nominated from the floor. Indeed, there is no requirement that shareholders even be informed that such a nomination may be made.
There are two issues with allowing « surprise » nominations from the floor. First, a shareholder or shareholders holding a small voting block may purposely hide their intention to challenge management’s director nominees by waiting until the last minute to nominate alternate directors from the floor. By doing so, they can avoid engaging in a head to head proxy fight with the incumbent directors and management which, due to the dissidents’ small shareholdings, they might likely lose. In such a situation, management loses the ability to « make a case » for their nominees, and also has less chance to ensure that supportive shareholders vote at the meeting. In many ways, such an « ambush » nomination erodes the principle that shareholders should have the choice of who they elect as directors. If shareholders do not realise that their vote is needed to support the management nominees, they may chose not to vote, and end up beholden to the wishes of a small dissent group. Additionally, and quite rationally, management may forgo a costly and time consuming, though ultimately beneficial, solicitation process if there is no indication that such a process is required. A recent decision of the British Columbia Supreme Court1 has recognized these issues and the benefits of an advance notice policy:
… the [advance notice] Policy in fact ensures an orderly nomination process and that the shareholders are informed in advance of an AGM what is in issue. In doing so the Policy prevents a group of shareholders from taking advantage 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.
Second, shareholders should not be expected to make a choice « on the spot » between management nominees whose credentials have been publically and fully disclosed, and surprise nominees about whom little is known and about whom no information can be verified or carefully considered in the allotted timeframe. Shareholders should have ample time and information to properly evaluate management and dissident nominees.
As a solution, we suggest that companies consider adding an advance notice requirement to their by-laws. Essentially, the company by-laws would be amended to prevent nominations from the floor. Additionally, the identity of all director nominees, along with relevant disclosure regarding such nominees would need to be provided to management well in advance of the meeting at which such director nominees are to be elected, and such information would then be disseminated to shareholders.
While such advance notice by-laws are not widespread in Canada, their appropriateness has been considered generally accepted by Canadian courts2 and they have been used extensively in the United States for many years. That said, there are some nuances to drafting and adopting such by-law amendments, such as ensuring that any advance notice mechanism be contained in a company’s by-laws, rather than existing as a matter of board policy; such advance notice by-laws be approved by shareholders; and the by-laws should be capable of being waived at the board’s discretion (an element that the courts have noted shows good faith on behalf of the board as such discretion is reviewable by a court). Indeed, Delaware courts have in some cases taken a strict construction approach to such advance notice mechanisms – accepting them, but interpreting any ambiguity therein in a manner « most favorable to the free exercise of traditional electoral rights »3 – which is to say, in a manner favourable to shareholders who wish to make nominations from the floor. Anyone considering adopting such by-laws should seek the advice of experienced legal counsel.
In the event that a company has not yet adopted advance notice by-laws, and suspects it may be subject to a stealth proxy fight, the directors do have a few options. If time is short, directors should consider postponing the shareholder meeting at which the contested election is to be held.4 Directors may then either amend the company’s by-laws to include advance notice policies, or adopt a similar advance notice directors’ policy prior to the shareholder meeting in question. This approach will ensure that shareholders receive sufficient information to duly elect directors and to ensure the integrity of the election process. In any event, responding quickly, effectively and properly to the threat of an election ambush is highly technical and directors in such a position should engage legal counsel immediately.
1 Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090 (hereinafter, “Mundoro”)
2 See Mundoro
3 JANA Master Fund, Ltd. v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. March 13, 2008), aff’d 2008 WL 2031337 (Del. S. Ct. May 13, 2008)
4 The power of directors to postpone a shareholders meeting called by them has been affirmed in Mundoro and other Canadian cases such as Canadian Jorex Ltd. v. 477749 Alberta Ltd. (1991), 85 Alta. L.R. (2d) 313