Proxy Battles And Oppression: Lessons From Skychain For Boards And Activists At Contested AGMs

Overview and Key Takeaways

What constitutes oppression of a dissident shareholder at a contested AGM? The British Columbia Supreme Court's ruling in Skychain Technologies offers instructive guidance for companies and activists alike.

At issue was the AGM chair's rejection of proxies representing a majority of the company's shares which if accepted would have elected the dissident's slate of directors. The Court held that oppression had occurred on both procedural and substantive grounds.

Our key practical takeaways include:

• AGM chairs should provide an explanation for important decisions they make. This explanation need not be elaborate, but should include sufficient facts and reasoning.
• The appearance of a lack of impartiality on the part of the AGM chair will weigh in favour of a finding of oppression. In this case, the Court frowned upon the company's counsel interjecting to respond to shareholder questions on the chair's behalf.
• The precise wording of the company's articles may be decisive. Companies may want to review the text of their advance notice provisions in light of the Court's analysis.

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The Facts in Brief

The dissident shareholder (the Dissident) had amassed proxies representing 54.77% of the shares in the company (the Company). The Dissident had also assembled an alternative slate of directors, each of whom was connected to a former CEO and director of the Company (the Former CEO), whom the Company was suing in connection with his conduct in those roles.

Prior to the AGM, the Company issued two press releases stating the Dissident's proxies were invalid for failure to comply with the advance notice requirements in the Company's articles of incorporation (the Articles). These required, inter alia, that the advance notice include the "full particulars" of any arrangement by which the shareholder has a "right to vote or direct the voting" of any of the Company's shares.

The only explanation given by the press releases for the Company's assertion that the Dissident's advance notice did not comply with the Articles was that the notice failed to disclose (1) the longstanding relationship between the Dissident and the Former CEO, and (2) the arrangement between the Dissident and certain other Company shareholders regarding the Dissident's slate.

The press releases also alleged that the Dissident was working "jointly and in concert" with certain other Company shareholders regarding the Dissident's slate. The Dissident responded with its own press release denying that any arrangement existed that required disclosure in the advance notice under the Articles.

The Company proposed that its counsel and the Dissident's counsel meet the day before the AGM to present their respective positions on the validity of the Dissident's proxies to the Company's board chair, who would also be chairing the AGM (the Chair). The Dissident declined on the basis that it had already stated its position, i.e., that there was no arrangement granting it the right to vote or direct the voting of any Company shares. The meeting between the Company's counsel and the Chair proceeded without the Dissident's counsel.

At the AGM, the Chair stated that he had ruled the Dissident's proxies to be invalid the day before. Counsel for the Dissident objected and asked the Chair to explain the basis for the ruling. Counsel for the Company interjected to answer for the Chair, stating that the Dissident's counsel had been invited to address the issue with the Chair the previous day but had declined, and that the Dissident's opportunity to challenge the ruling had therefore passed. A proxy representative for other shareholders who had arrived late to the AGM also asked for an explanation. Once again, the Company's counsel answered on behalf of the Chair, asserting that the reasons for the Chair's decision were not yet public.

The Oppression Ruling in Brief

Oppression requires two elements: first, that the applicant had a reasonable expectation regarding the company's affairs, and second, that this reasonable expectation was violated by oppressive or unfairly prejudicial conduct. The Court emphasized that, because voting at a shareholder meeting is a "fundamental" shareholder right, shareholders have a legitimate expectation that dissident proxies will be "fairly considered and properly addressed at AGMs in accordance with corporate and securities law".

Procedural Oppression

In addressing the degree of deference owed to the Chair's decision, the Court noted that chair decisions are reviewable "only if they are unreasonable or where there is an error of law." In this case, the Court had "difficulty" giving deference to the Chair's decision given the Chair's refusal to explain his ruling at the AGM.

The Court agreed with the Dissident that a shareholder "can legitimately expect the chair of a contested shareholder meeting to give some explanation for the very consequential decision to reject a class of proxies". The chair's reasons need not be "elaborate", but "some amount of explanation is called for." The Chair's "refusal to offer even a cursory explanation" for his ruling was therefore oppressive.

The Chair's conduct also undermined his impartiality in the Court's eyes. Key to the Court's concern was that, when asked at the meeting to explain his decision to reject the Dissident's proxies, the Chair allowed the Company's counsel to respond for him. The Court interpreted this as a "coordinated refusal" by the Chair and Company that gave rise to a "reasonable apprehension that the [Chair] was not impartial but was simply doing management's bidding".

The Chair's apparent lack of impartiality therefore contributed to the Court's finding that oppression had occurred.

Nor did it matter that the Dissident was invited to meet with the Chair the day before the AGM to discuss the proxy issue but declined. The Dissident and the shareholders who endorsed the proxies retained the right to "know why their votes would not be counted at the AGM."

Substantive Oppression

As mentioned, the Articles required an advance notice to include the "full particulars" of any arrangement giving the shareholder "a right to vote or direct the voting" of any Company shares. The Company argued this required disclosure by the Dissident of its coordinated action with certain other shareholders to elect the Dissident slate.

The Court disagreed. It explained that this wording did not require disclosing that the shareholder is "working or collaborating with other shareholders towards electing a dissident slate." The Court stressed that such collaboration would only be captured by the Articles where it conferred on the Dissident "a right to vote or direct the voting of any shares". There was no evidence of any such agreement, understanding or arrangement. The Chair's ruling was therefore oppressive because it was based on an unreasonable reading of the Articles.

The Court contrasted the Articles' wording with the text of other articles in another activist dispute. Specifically, provisions requiring the disclosure of arrangements "relating to the voting" of shares, i.e., as opposed to conferring a right to vote or direct the voting of shares. The Court observed, without ruling, that such wording "may" have been triggered in the circumstances.

Concluding Comments

Contested shareholder meetings must be navigated thoughtfully, both by the company and by shareholders. Skychain Technologies gives valuable guidance regarding when oppression might occur in this context, either on procedural or substantive grounds.

Meeting chairs should be prepared to provide reasonably detailed explanations for important decisions they make. Companies should appreciate that the conduct of their representatives can undermine the apparent impartiality of a meeting chair. Inadequate caution on either of these fronts can negate the deference that the decision of a meeting chair normally attracts.

The precise wording of the company's constating documents may be decisive in disputes arising from an activist campaign. In this case the Court explored what wording won't, and what wording may, require disclosure by a dissident of its coordination with other shareholders. Companies may want to review the text of their constating documents and governance policies to ensure that the wording used therein is aligned with the Company's expectations if confronted with activist activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.