RECENT DEVELOPMENTS IN CANADIAN

COMPANY LAW:

WHAT CARIBBEAN COMPANIES

NEED TO LOOK OUT FOR

Nadia Chiesa416-947-5084

nchiesa@weirfoulds.com

2nd Annual Caribbean Corporate Counsel Summit 20146-7 November 2014

Miami, Florida

WEIRFOULDS LLP

• Canada's oldest law firm

• Located in Toronto, Canada

• Full-service law firm with 4 core practice areas:

1. Litigation

2. Corporate

3. Property

4. Government Law

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COMPANY LAW IN CANADA:A Brief History

• 1844: British origins: Joint Stock Exchange Companies Act

• 1867: Confederation

• 1869: Joint Stock Companies Letters Patent Act 1869.

– First "home-grown" Canadian companies statute, of generalapplication

• 1965: Ontario was the first province to modernize Canadian companylaw

– Ontario Business Corporations Act

• 1971: Dickerson Report – considered corporate law at a federal level

– Canada Business Corporations Act

COMPANY LAW IN CANADA:Today

Federal

Canada Business Corporations Act R.S.C., 1985, c. C-44

Provincial

Ontario Business Corporations Act R.S.O. 1990, c. B.16

For free access to Canadian case law: www.canlii.org

CANADIAN COMPANY LAW AND THE CARIBBEAN

"It is common knowledge that the Barbados Companies Actborrowed heavily from Canadian precedents…"

Williams CJ of the Barbados Court of Appeal in Canwest InternationalInc. et al. v. Atlantic TV Ltd. et al. (1994) 30 Barb. LR 276

"The court must therefore pay particular regard to the Canadianjurisprudence in interpreting issues which arise under the Act."

Rampersad J of Trinidad’s High Court of Justice in EvolvingTecknologies and Enterprise Development Company Ltd v. Kenneth

Julien et al (2013)

RECENT DEVELOPMENTS INCANADIAN COMPANY LAW

We have identified a few issues which maybe relevant to corporate counsel when:

a) Advising directors/boards

b) Considering (avoiding?) potentiallitigation

c) Retaining outside counsel

RECENT DEVELOPMENTS INCANADIAN COMPANY LAW

1. Shareholder rights: Requisitioning a meeting

2. Directors' duties: Business judgment rule

3. Conflict of interest: Separate litigation counsel forcorporation and directors?

REQUISITIONING A MEETING: CBCA S. 143

(1) The holders of not less than five per cent of the issued shares of acorporation that carry the right to vote at a meeting sought to be held mayrequisition the directors to call a meeting of shareholders for thepurposes stated in the requisition. (…)

(3) On receiving the requisition … the directors shall call a meeting ofshareholders to transact the business stated in the requisition, unless

(a) a record date has been fixed ... and notice of it has been given. (…)

(4) If the directors do not within twenty-one days after receiving therequisition … call a meeting, any shareholder who signed the requisition maycall the meeting. (…)

(6) Unless the shareholders otherwise resolve at a meeting called undersubsection (4), the corporation shall reimburse the shareholders theexpenses reasonably incurred by them in requisitioning … the meeting.

REQUISITIONING A MEETING: CBCA S. 144

(1) A court, on the application of … a shareholder who is entitled to vote at ameeting of shareholders … may order a meeting of a corporation to becalled, held and conducted in the manner that the court directs, if

(…)

(c) the court thinks that the meeting should be called, held and conductedwithin the time or in the manner it directs for any other reason.

REQUISITIONING A MEETING

Trinidad Companies Act - s. 133

(1) The holders of not less than 5% of the issued shares of a company that carry theright to vote at a meeting sought to be held by them may requisition the directors tocall a meeting of shareholders for the purposes stated in the requisition.

(…)

(3) Upon receiving a requisition … the directors shall call a meeting of shareholdersto transact the business stated in the requisition, unless

(a) A record date has been fixed … and notice thereof has been given.

Barbados Companies Act - s. 129

(1) The holders of not less than 5% of the issued shares of a company that carry theright to vote at a meeting sought to be held by them may requisition the directors tocall a meeting of shareholders for the purposes stated in the requisition.

(…)

(3) Upon receiving a requisition … the directors must call a meeting of shareholdersto transact the business stated in the requisition, unless

(a) A record date has been fixed … and notice thereof has been given.

REQUISITIONING A MEETING

Similar provisions are found in the company law legislation in otherjurisdictions, with some variations.

For example:

• St. Kitts and Nevis: The requisite shareholding percentage before ashareholder can requisition the board is 10% (s.90(2)(a))

• Bahamas, Belize, Guyana and Jamaica: Requisitioned meetings arecalled "extraordinary meetings"

• Anguilla, the Bahamas and Belize: Shareholders calling a meetingbecause the directors failed to do so are not entitled reimbursement

Wells v. Bioniche Life Sciences Inc.2013 ONSC 4871

Facts:

• Wells had a 5% shareholding in Bioniche

• His first requisition of a shareholder meeting to replace all thedirectors was denied by the Board on the ground that it wasinvalid

– He was a beneficial shareholder, not a registered shareholder

• Wells sent a second requisition on 28 February 2013

• The second requisition was denied because a shareholdermeeting had already been fixed for November 2013

• Wells and another shareholder brought an application to thecourt for a second meeting and also called a shareholdermeeting for 27 August 2013

Wells v. Bioniche Life Sciences Inc.2013 ONSC 4871

Held:

• CBCA s. 143(3) provides an "exemption" to the requirementthat a board call a special meeting when requisitioned if ameeting has already been fixed

• The ability to requisition a meeting is a fundamentalshareholder right so the meeting must be fixed in a "timelyand expeditious manner"

– No definition/explanation of the term

• Here, it was a "close case"

• However, the November date was a "timely and expeditious"fixing of a meeting

Marks v. Intrinsyc Software International Inc.2013 ONSC 727

Facts:

• Marks requisitioned the board on 10 December 2012– Seeking to replace the directors

• Board responded 10 days later by fixing a meeting date of 14May 2013

• Unhappy the meeting date was more than 5 months away,Marks applied under CBCA s. 144 for the court to set analternative meeting date

• Marks argued the board had an obligation to schedule theearliest possible meeting date

Marks v. Intrinsyc Software International Inc.2013 ONSC 727

Held:

• The application was dismissed

• The Court agreed that the board had acted "quickly andexpeditiously"

• "It is not so much the length of the delay, or the timing of themeeting, but the reasons for it that must inform my analysis ofwhether the board is acting appropriately"

• Here, among other things, holding two meetings would becostly, and confusing for other shareholders

REQUISITIONING A MEETING:Some Lessons Learned

• Fundamental shareholder right rendered meaningless unlessthe meeting is "timely and expeditious“

– Term was first used in Paulson & Co. v. Algoma Steel Inc. 76OR (3d) 191, 2006 CanLII 116, where the requisition was senton 1 November 2005 and the meeting was fixed for 22 March2006

• Wells and Marks fleshed out the meaning of "timely andexpeditious" and the correct course of conduct for boardsfollowing receipt of a requisition

– Wells: A 6-month gap between a meeting and the requisition wasa "close case"

REQUISITIONING A MEETING:Some Lessons Learned

• Directors should be aware that merely having a fixed meetingdate may not be sufficient to satisfy the obligation to fix ameeting in response to a request

• In-house counsel can look to the facts and the court’sanalysis in these cases to advise as to the likely boundariesof when a meeting date is appropriately fixed

• Similar legislation in the Caribbean suggests boards andcounsel may be faced with this issue

BUSINESS JUDGMENT RULE

Courts are ill-suited and should be reluctant to second-guess the application of business expertise to theconsiderations that are involved in corporate decisionmaking, but they are capable, on the facts of any case, ofdetermining whether an appropriate degree of prudenceand diligence was brought to bear in reaching what isclaimed to be a reasonable business decision at the time itwas made.

Supreme Court of Canada in Peoples Department Stores Inc.(Trustee of) v. Wise, [2004] 3 SCR 461, 2004 SCC 68

BUSINESS JUDGMENT RULE

[T]he court must be satisfied that the directors have actedreasonably and fairly. The court looks to see that thedirectors made a reasonable decision not aperfect decision. Provided the decision taken is within arange of reasonableness, the court ought not to substituteits opinion for that of the board even though subsequentevents may have cast doubt on the board’sdetermination. As long as the directors have selected oneof several reasonable alternatives, deference is accordedto the board’s decision.

Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 OR (3d)177

BUSINESS JUDGMENT RULEAND DIRECTORS' DUTIES

CBCA s. 122(1)

Every director and officer of a corporation in exercisingtheir powers and discharging their duties shall

(a) act honestly and in good faith with a view to thebest interests of the corporation; and

(b) exercise the care, diligence and skill that areasonably prudent person would exercise incomparable circumstances.

• Similar statutory duties are imposed in the Caribbean

• E.g. Barbados Companies Act, s. 95(1)

Unique Broadband Systems Inc., Re2014 ONCA 538

Facts:

• Directors had a conflict of interest under a remunerationarrangement

• Directors decided to terminate the arrangement, and madecancellation payments to themselves, above current sharevalue

• Once disclosed to shareholders, the directors were not re-elected

• One director sought to enforce his enhanced severancepayment

• UBS refused, alleging breach of a fiduciary duty

Unique Broadband Systems Inc., Re2014 ONCA 538

Held:

• The business judgment rule did not protect the director

• The rule is a rebuttable presumption that directors/officersacted on:

– An informed basis

– In good faith

– In the best interests of the corporation

"Courts will defer to business decisions honestly made, but theywill not sit idly by when it is clear that a board is engaged inconduct that has no legitimate business purpose and that is inbreach of its fiduciary duties."

BUSINESS JUDGMENT RULE:Recent Case Law

Renegade Capital v. Dominion Citrus 2013 ONSC 1590

• When a director seeks to rely on the business judgment rule,he must actually evidence the use of appropriate businessjudgment

• No absolute presumption in favour of the exercise of businessjudgment

BUSINESS JUDGMENT RULE:Recent Case Law

Cytrynbaum v. Look Communications 2013 ONSC 455

• Director relied on the business judgment rule and the fact thathe had consulted with his solicitor about the rule

• The court was skeptical that this alone was a real applicationof the business judgment rule

• Evidence showed that the solicitor's "advice" was merely arecital of the business judgment rule

• There is a presumption of good faith and deferentialtreatment of the rule unless there is a strong prima facie caseof bad faith

BUSINESS JUDGMENT RULE:Some Lessons Learned

• Generally, the court will not "second guess" the decisionsmade by directors

– Directors are in the best position to make the bestdecision of the corporation

• No absolute deference

• Counsel cannot simply explain the rule to directors

• Need evidence of appropriate business judgment

CONFLICTS OF INTEREST:Acting for the corporation and directors

• Company X is sued by a minority shareholder

• Directors Y and Z are also named as respondents

• They all need litigation counsel

What do you do?

CONFLICTS OF INTEREST:Acting for the corporation and directors

"It is a fundamental error to regard a corporation as beingsynonymous with its majority directors and shareholders."

Rice v. Smith, 2013 ONSC 1200

• Litigants have a right not to be deprived of their counsel ofchoice

• However, lawyers must not place themselves in any situationwhere there is or is likely to be a conflicting interest

• Often a live issue in shareholder disputes

– Can be an inherent conflict of interest precluding jointrepresentation

Rice v. Smith2013 ONSC 1200

Facts:

• Closely-held company; 3 director-shareholders/employees

• Rice was terminated (allegations of impropriety) but remaineda director

– Corporate counsel was involved in the termination

• Rice brought an oppression claim against the other twodirectors and the company

– Corporate counsel agreed to act for all defendants, at the company'sexpense

• Rice sought to remove corporate counsel from the record

Rice v. Smith2013 ONSC 1200

Held:

• Counsel's joint representation of the company and the twodirectors amounted to an impermissible conflict of interest

• His fundamental approach to the parties and disputeillustrated precisely the sort of conflict of interest problemsidentified by the authorities

• Counsel had paid insufficient regard to the distinct legalpersonality of the company - he treated the company andmajority director shareholders as being one and the same

• Counsel was billing the company for legal work done todefend the personal interests of the two directors

Acting for the corporation and directors:Lessons learned… or more questions?

• Counsel have a duty to avoid conflicts of interest – or eventhe appearance of conflict

• Remember the corporation is distinct from its directors

• Joint representation can also raise privilege issues

• Ideal:– Corporation and directors have independent counsel

• Reality:– Separate counsel significantly increases legal costs

– Where directors have a statutory/contractual right to indemnification,results in much higher costs to the corporation

– Defendant directors may still be instructing counsel on behalf of thecorporation

CREDIT IS DUE TO …

Thank you to James White, visiting FoxScholar, for his assistance in thepreparation of this presentation

QUESTIONS

THE END – THANK YOU

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Nadia Chiesa

Tel: (416) 947-5084E-mail: nchiesa@weirfoulds.com