Court Upholds AGM Chair’s Rejection Of Proxies Due To Material Misrepresentations In The Dissidents’ Circular

by Dentons
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Overview

In Hastman v. St. Elias Mines Ltd., 2013 BCSC 1069, dissident shareholders, with proxies representing over 90% of the vote, attended the Annual General Meeting (the “AGM”) of St. Elias Mines Ltd. (the “Company”). The Chair presiding at the AGM refused to accept these proxies due to material misrepresentations in the dissidents’ information circular (the “Circular”). The B.C. Supreme Court upheld the Chair’s ruling.

Discussion

The Company was a junior mining company incorporated under the British Columbia Business Corporations Act (the “BCBCA”). In 2012, certain shareholders expressed their dissatisfaction with management. After the dissidents proposed their nominees to the Company’s board (the “Nominees”), the Company stated in its management information circular that two of the Nominees were ineligible to serve. The dissidents subsequently published their own Circular which disagreed with this position.

The day after the Circular was published on SEDAR, the Company wrote to the dissidents pointing out that the Circular contained serious and material misstatements, ranging from misstating educational credentials to incorrectly stating that none of the Nominees will be unable to serve.

At the AGM, the Chair rejected the dissidents’ proxies as being invalid due to uncured misrepresentations in the Circular. She considered that the dissidents had been given an opportunity to rectify these issues but had failed or refused to do so in advance of the AGM. She also was concerned that two of the Nominees would be unable to serve. As such, the management nominees were elected.

The dissidents brought an application under section 227 of the BCBCA for a remedy in oppression against the Company, the Chair and certain other individual respondents. Justice Steeves of the British Columbia Supreme Court determined that the Circular contained material misrepresentations.

Justice Steeves held that while “a proxy battle does not always operate by Marquess of Queensberry Rules” it is important that information circulars “be complete and accurate”, noting that the dissidents should have ensured the Circular was correct or, at minimum, issued a press release.

Comment

The dissidents argued that Kluwak v. Pasternak (2006), 26 B.L.R. (4th) 215 (Ont. S.C.J.) applied. In Kluwak, while the judge found the dissidents’ circular contained material misrepresentations, she nonetheless overturned the chair’s decision to disallow the proxies. Justice Steeves distinguished Kluwak on two grounds. In Kluwak, the Court had found that it would be unfair to allow management to “wait in the weeds” and only raise concerns about the dissidents’ circular at the meeting at issue. However, in this case, management immediately informed the dissidents about the problems with their Circular. Additionally, Justice Steeves held that there is no equivalent provision in the BCBCA to section 107 of the OBCA which grants the Court broad discretion in “determining any controversy” regarding an election. Note, however, that the oppression remedy has been described by commentators as: “beyond question, the broadest, most comprehensive and most open-ended shareholder remedy in the common law world … unprecedented in its scope.” Had the Company’s management behaved as the management in Kluwak had, it is quite possible that Justice Steeves might have been persuaded to engage the broad oppression remedy powers to make an appropriate order.

This decision illustrates the importance of ensuring the accuracy of an information circular in a proxy contest. Even though 90% of the votes had been cast for the dissidents, the Court still upheld the Chair’s decision to reject those proxies due to material misrepresentations made in the Circular. The decision also illustrates that if management believes there are problems in the dissidents’ materials, management must be proactive in alerting dissidents to these problems rather than waiting in the weeds.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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