On July 16, 2008, Justice Wilton-Siegel of the Ontario Superior Court of Justice rendered his decision in William M. Wells and Biovail Corporation v. Eugene Melnyk and EM Holdings B.V.  The decision deals with a number of issues susceptible to arise in proxy battles:

• Can a board of directors amend a by-law in advance of an upcoming shareholders meeting with effect for that meeting?
• Does the Court have the authority to retrospectively validate an improperly constituted shareholders meeting?
• Does the Court have the authority to validate the appointment of directors elected during an invalidly constituted meeting, and if so, under what circumstances?

Background

On March 12, 2008, Biovail’s board of directors gave notice of the time and place of the annual shareholders meeting. The next day, Eugene Melnyk, Biovail’s largest shareholder, announced his intention to propose an alternative slate of nominees for the board. Both Biovail and Melnyk mailed their proxy circulars identifying their slates of nominees. The corporation and its largest shareholder then concluded an agreement regarding the conduct of the meeting, which provided, among other things, that Melnyk would have access to the results of the proxy solicitation. The agreement did not expressly oblige Melnyk to attend, tender a proxy, or vote his shares at the meeting.

On the eve of the meeting, the proxy results indicated that Biovail’s slate would receive 62 million votes against 36 million for that of Melnyk. Just prior to the meeting of shareholders, Melnyk revoked his proxy, reducing the number of outstanding shares represented at the meeting below the quorum of 51% of all outstanding shares required by Biovail’s by-laws. In response, the board met just before the shareholders meeting and passed a resolution amending  Biovail’s by-laws to reduce the quorum at the shareholders meeting to 25% of all outstanding shares. The board did not put the by-law to a vote at the annual meeting but said it would do so at the next meeting. The Chair declared the meeting properly constituted. When the time came to nominate directors for election, Biovail presented its slate of nominees, while Melnyk’s representative refused to do so on the basis that the meeting was not properly constituted. The management slate of nominees was thus elected with a vast majority. Biovail then applied for an order validating the election of the board, while Melnyk filed a counter-application seeking a declaration that the shareholders meeting was invalid and an order calling a new meeting.

Can a board of directors amend a by-law in advance of an upcoming shareholders meeting with effect for that meeting?

Biovail argued that Melnyk had breached the agreement regarding the conduct of the meeting. Using the applicable principles of interpretation, the Court found that the agreement did not preclude Melnyk from revoking the proxy prior to the meeting. The Court then proceeded to determine whether the board could reduce the quorum as it did.

Under the Canada Business Corporations Act (the “CBCA”), the board of directors may, by resolution, make, amend or repeal any by-laws. The new by-law, amendment or repeal of a by-law is effective from the date of the resolution and stays in effect until it is confirmed, confirmed as amended, or rejected by the shareholders. Thus, the board has to submit the by-law, its amendment or its repeal to a vote at the next meeting of shareholders or it will cease to have effect.

The CBCA also requires that, when special business is to be transacted at a shareholders meeting, the notice of meeting must state the nature of that special business in sufficient detail to permit shareholders to form a reasoned judgment thereon. Any business other than consideration of the financial statements, auditors’ reports, election of directors and appointment of auditors is considered “special business”.

The Court stated that as a by-law amendment was an item of special business:

• the amendment had to be submitted at the first meeting of shareholders following such amendment; and
• the amendment ceased to be effective for lack of notice and proper shareholder approval.

The Court concluded that, as a practical matter, a board of directors cannot amend or repeal a by-law unless it does so sufficiently in advance of the next meeting of shareholders so that the notice requirements for that meeting can be met. The by-law reducing the quorum was therefore void, and the meeting invalid for lack of quorum.

Does the Court have the authority to validate retrospectively an improperly constituted shareholders meeting?

Section 144 of the CBCA enables a Court to call, hold or conduct a meeting of shareholders when it would otherwise be impractical to do so. Biovail argued that the Court could use this section to retrospectively validate the improperly constituted shareholders meeting. The Court decided that section 144 is prospective rather than retrospective in nature. Thus, while the Court could in appropriate circumstances order a shareholders meeting to take place with a reduced quorum in the future, it could not validate a meeting that had already been held.

Does the Court have the authority to validate retrospectively the election of directors? If so, under what circumstances?

Section 145 of the CBCA provides authority to the Court to determine disputes relating to elections of directors. This section, Biovail argued, allows the Court to validate the election of directors that occurred during an invalidly constituted meeting if, in the Court’s discretion, it is appropriate to do so.

The Court refused to rule specifically on this point but indicated that:

• the powers conferred by section 145 were not unlimited; and
• section 145 did not allow an invalid meeting to be deemed valid or an invalidly elected board to be validly elected, except in respect of deficiencies of a technical nature or in which the applicant has acquiesced.

The Court found that even if it had that authority, it should not exercise its discretion to do so in this specific case. For the Court to exercise such discretion, an applicant would need to demonstrate clearly:

• the fairness of the proxy contest; and
• that it would be in the corporation’s best interests to determine the proxy contest immediately.

In assessing the fairness of the proxy contest, the Court looked at whether the parties had complied generally with applicable laws and the charter and the by-laws of the corporation and whether a party was in breach of a legally binding obligation to vote shares or tender proxies at the meeting. In assessing the corporation's best interest, the Court focussed exclusively on material prejudice and looked for evidence of “significant economic harm” flowing from the uncertainty. The Court rejected Biovail's arguments that:

• a fair proportion of the shareholders were represented at the meeting; or
• the motivation of Biovail’s board in enacting the by-law amendment was to give the shareholders the opportunity to decide the issue rather than to thwart Melnyk; or
• a 25% quorum is not atypical.

Biovail ultimately reconvened its shareholders meeting on August 8, 2008.  Melnyk ultimately withdrew his dissident slate, allowing management's slate of directors to be elected at the re-convened meeting.

If you would like further information about the case, please contact Maryse Bertrand Ad.E. (514.841.6460), Neil Kravitz (514.841.6522) or Louis-Martin O’Neill (514.841.6547) in Montréal or Carol Hansell (416.863.0900), Kent E. Thomson  (416.863.5566), James W.E. Doris  (416.367.6919), or Brian Calalang (416.863.5553) in Toronto.
 
Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.