Important New Guidance from the Court of Appeal on TSX Majority Voting Rules, Reasonable Expectations

Bennett Jones LLP

Bennett Jones LLPSince 2014, the Toronto Stock Exchange (TSX) has required listed issuers without a majority shareholder to implement a majority voting policy requiring each of its directors to be elected by a majority of the votes cast (50 percent plus one vote) with respect to their election at uncontested shareholder meetings. The TSX's Majority Voting Requirement (the TSX Requirement) provides that, subject to exceptional circumstances, any director who fails to meet this threshold must immediately tender their resignation.

In Baylin Technologies Inc. v Gelerman, 2021 ONCA 45, the Ontario Court of Appeal provided helpful guidance on the application of the TSX Requirement, clarifying that in determining whether a director obtained a majority of votes, votes that are withheld are to be treated as votes against the director's election. Additionally, the Court of Appeal provided an important reminder that reasonable expectations in relation to an oppression claim are to be assessed objectively. Finally, the Court of Appeal also provided important guidance concerning the ability to use contractual set-off clauses in respect of non-monetary property such as share certificates.

Background Facts

Under the terms of an asset purchase agreement (APA) between Spacebridge Inc. and Baylin Technologies Inc. under which Baylin acquired Spacebridge, David Gelerman, the president and CEO of Spacebridge, was to be nominated for election to Baylin's board of directors at both the 2018 and 2019 annual general meetings (AGM) of Baylin's shareholders.

Gelerman was nominated and elected to Baylin's board at the 2018 AGM. However, prior to the 2019 AGM, Gelerman received a letter from a member of Baylin's board advising that while he would be nominated for re-election pursuant to the terms of the APA, Baylin's largest common shareholder did not intend to vote in his favour. Gelerman was encouraged in the letter to contact the shareholder to discuss the concerns relating to Gelerman’s presence on Baylin's board, but Gelerman did not respond. At the 2019 AGM, Gelerman only received 29.13 percent of votes in favour of his election whereas 70.87 percent of the votes were withheld. After the meeting, Gelerman's resignation was requested pursuant to Baylin's Majority Voting Policy (the Policy), which required that a director receive more "for" votes than "withheld" votes in their election. Gelerman refused to tender his resignation, and brought a claim seeking an order under the oppression remedy set out in section 248 of Ontario's Business Corporations Act allowing him to serve a second year as a director of Baylin.

In addition to the claims regarding Gelerman's directorship, Baylin asserted claims for indemnity against Spacebridge, and sought to exercise its rights under a contractual set-off clause in the APA, which allowed Baylin to set-off any indemnification amount to which it was entitled under the APA against amounts otherwise payable to Spacebridge. Baylin sought to set-off against instalments of share certificates payable to Spacebridge under a consulting agreement entered into in conjunction with the APA, which stipulated that a portion of the consulting fees were to be paid by instalments of Baylin share certificates held in trust until their release to Spacebridge.

Baylin's Majority Voting Policy

The lower court set Baylin's Policy aside finding that it did not comply with the TSX Requirement as it treated withheld votes as votes against a director's election, instead of recognizing them as votes not cast at all. This was held to be contrary to the TSX Requirement's reference to a director needing to receive a majority of votes cast with respect to their election.

Writing for the Ontario Court of Appeal, Nordheimer JA held that the purpose of the TSX Requirement was "to provide a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors." To accomplish this purpose the TSX Requirement was designed to consider withheld votes as votes against a director's election. This ensured that no director could be elected with a single vote in their favour as is possible under Canadian corporate statutes where withheld votes are not counted in the tally of votes. Therefore, Baylin's Policy, which provided that a director had to receive more "for" votes than "withheld" votes, was declared to be compliant with the TSX Requirement and that it remains in force.

Additionally, the Court of Appeal noted that although the TSX has provided certain examples they believe constitute exceptional circumstances that would justify a company's refusal to accept a director's resignation in the absence of that director receiving majority of votes (e.g., if accepting a director's resignation would render the listed issuer non-compliant with corporate or securities law requirements, applicable regulations, or commercial agreements regarding the composition of the board), the TSX Requirement does not mandate that these exceptional circumstances be included in each policy, and a listed issuer is free to expressly stipulate within its own majority voting policy what it will consider an exceptional circumstance providing grounds to refuse a director's resignation.

Reasonable Expectations and the Oppression Remedy

While the lower court held that Gelerman had a reasonable expectation that he would be a director of Baylin for a two-year period based upon the terms of the APA, the Court of Appeal determined that while Gelerman may have held a subjective belief that he would be a director of Baylin for that period, this was not an objectively reasonable expectation for two reasons:

  1. The APA only stated that Gelerman would be nominated for election. Gelerman did not obtain an undertaking that he would be given support in his election, and this was a protection that could have been bargained for as part of the terms of the APA. The Court of Appeal noted that this type of commitment was specifically requested by Gelerman in connection with the negotiation of the APA, but it was expressly rejected by Baylin.
  2. Gelerman was warned in advance that he would not have sufficient support for his election at the 2019 AGM, and took no steps to seek the support of Baylin's largest shareholder prior to the 2019 AGM.

Accordingly, the Court of Appeal found that there was no oppressive conduct on the part of Baylin.

Contractual Set-Off Clauses

The lower court determined that Baylin was not permitted to set-off its indemnification claims against the share certificates held in trust, as the set-off clause under the APA only allowed for set-off against amounts otherwise "payable" by Baylin to Spacebridge. The lower court found that under the consulting agreement, Baylin's fee was "paid" when the share certificates were delivered to its counsel, who acted as trustee, holding the certificates in trust until their release in quarterly instalments over the two-year period following the execution of the agreement.

However, the Court of Appeal disagreed, and ruled that the share certificates held in trust were still amounts that remained "payable" from Baylin to Spacebridge. In this regard, the structure of the consulting agreement provided that the amounts due to Spacebridge were to be paid out over a two-year period, and thus the Court of Appeal found that the share certificates were not truly "paid" until they were released by the trustee at the end of each quarter. Accordingly, the Court of Appeal held that the share certificates were within the scope of the APA's set-off clause.

The Court of Appeal also noted that there was a lack of jurisprudence analyzing whether share certificates could be subject to a set-off claim. It was acknowledged that the concept of legal set-off requires mutual debts, and that equitable set-off is only available in respect of claims for monetary sums. Therefore, a claim of set-off against share certificates would not be possible under either doctrine as shares do not constitute debt obligations owed to a shareholder, nor are they akin to a sum of money. However, the Court of Appeal stated that since Baylin sought to invoke a contractual right to set-off that was bargained for under the APA, the claim was not limited by the requirement of mutual debts and monetary sums, and thus Baylin was able to assert a claim to set-off the indemnification amount against the share certificates held in trust.


The Ontario Court of Appeal's decision in Baylin Technologies provides a number of important takeaways:

  1. In determining that Baylin's Policy was compliant with the TSX's Majority Voting Requirement, the Court of Appeal clarified that withheld votes for the election of a director are to be treated as votes against election, ensuring that the goals of shareholder democracy and director accountability as intended by the TSX are fulfilled.
  2. In light of the Court of Appeal's decision, TSX-listed companies may consider reviewing their majority voting policies given the new judicial guidance that the TSX's guidelines are flexible in nature. Accordingly, while the guidelines must be followed, companies should have more latitude to draft majority voting policies that are tailored to their specific circumstances and objectives.
  3. The decision in Baylin Technologies makes it clear that expectations will not be found to be reasonable in the context of an oppression claim where the expected result is beyond the scope of what a party had bargained for under a negotiated agreement.
  4. The Court of Appeal's decision provides important guidance on contractual set-off clauses, highlighting that parties can contract for a right to set-off against non-monetary property such as share certificates held in trust, and in so doing, can override the stringent requirements of the doctrines of legal and equitable set-off which would typically preclude such a practice.

 Special thanks to articling student Peter Douglas for his assistance with preparing this blog post.

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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