Thursday, 26 July 2012

BCSC Confirms that Directors Have Residual Powers

Shareholders elect directors to manage their company until the next annual general meeting (AGM).  The directors, who may also be removed by the shareholders, must act in accordance with the specific duties and powers set out in the applicable corporate statute (e.g., B.C. Business Corporations Act or the Canada Business Corporations Act) and the company's articles.  For example, directors have the powers to call AGMs every 12 to 15 months and to call special general meetings.  This is, of course, trite law.  

What is not so trite, and was addressed in Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090, is whether directors have residual powers, i.e., powers that are not expressly granted to them or the shareholders by statute or the articles.  In Northern Minerals, the court found that, notwithstanding older authorities suggesting otherwise, directors do have residual powers.  The court's conclusion was based on s. 136 of the BCBCA and s. 102 of the CBCA, which provide that directors must "manage or supervise the management of the business and affairs of a corporation".  

In the circumstances, the court found that the directors' residual powers included the following:
  • the power to postpone an AGM that has already been called (as long as it is held within 15 months of the previous AGM, in accordance with s. 182(1)(b));
  • the power to change the record date for the AGM; and
  • the power to create a nomination policy that sets a deadline by which time shareholders are required to submit nominations for directors.
In this case, a public company called a pro forma AGM to consider and approve financial statements, elect directors, and re-appoint auditors.  Two weeks before the AGM, the board approved an "Advance Notice Policy", which fixed a deadline by which shareholders were required to submit nominations for directors, and only persons nominated in accordance with the Policy would be eligible for election.  The Petitioner, an 8% shareholder, objected to the Policy as ultra vires the board.  After receiving his objection, the board postponed the AGM for two months and advised that it would seek shareholder approval for the Policy.  The Petitioner sought a declaration invalidating the postponement and the Policy.

The crux of the Petitioner's argument was "that directors’ powers must be expressly conferred and that they do not have any residual powers."  Neither the BCBCA nor the company's articles expressly provided for postponement of AGMs or restricted the nomination process.  Thus, the Petitioner argued that the directors did not have the power to postpone the AGM or create the Policy which would mean that directors could no longer be nominated at any time up to an including the AGM.

In support of his argument, the Petitioner relied on Smith v. Paringa Mines Ltd., [1906] 2 Ch. 193, where it was concluded that, "in the absence of express authority in the articles of association, the directors of a company have no power to postpone a general meeting."  The court rejected Paringa as outdated and preferred the "more modern approach" of the Alberta Court of Appeal in Canadian Jorex Ltd. v. 477749 Alberta Ltd.:
[10]      Several reasons exist for rejecting this unduly restrictive approach to directors’ powers.  First, as noted earlier, s. 102 of the CBCA statutorily confers on the directors of a corporation all residual powers to manage a corporation’s affairs.  To suggest that the directors enjoy no specific power unless it has been expressly granted to them by the CBCA would effectively render the s. 102 “basket clause” redundant.  This result would run counter to the philosophy underlying the basket clause.  The effect of this clause is that the directors’ powers to manage a corporation’s affairs are unlimited except to the extent these powers may have been circumscribed by the corporation’s bylaws or a USA.  Of course, in keeping with the fundamental principles of corporate law, the directors’ powers must be exercised for proper purposes.
[11]      Second, a rigid, no-exceptions approach to cancellation can lead to unreasonable results.  If, for example, a special meeting were convened to discuss a takeover bid and that bid were withdrawn before the date of the scheduled meeting, why should the directors be required to proceed with the holding of a pointless meeting?  Other equally valid examples spring to mind.  An interpretation of the directors’ powers giving rise to any absurd or unintended results must be rejected.
The court also agreed with the decision in Oppenheimer & Co. v. United Grain Growers Ltd. (1997), 120 Man. R (2d) 281 (Q.B.), where it was held that the Paringa "was an unduly restrictive approach to directors’ powers, a restrictive approach which could lead to unreasonable results."

Having found that the board had the power to postpone the AGM, the court refused to find that this decision was made for an improper motive, such as protecting the directors' positions.  Instead, the court found that it was the Petitioner's conduct that was prejudicial to other shareholders:
The petitioner’s action, if carried out as originally apparently planned, would have denied the majority of shareholders an opportunity to participate given the expectation that the meeting would be in effect pro forma.  The late announcement by the petitioner of its intentions would not permit sufficient time to insure that all shareholders were advised and given the opportunity to attend or submit their proxies.
The court also refused to invalidate the Policy, finding that the directors had the power to enact it because they were not expressly precluded from doing so.  Furthermore, the court found that the Policy was reasonable and was generally accepted as a device for protecting shareholder rights:
[47]      In this case it has not been established that the Policy is one that infringes shareholder rights.  Rather, the Policy in fact ensures an orderly nomination process and that the shareholders are informed in advance of an AGM what is in issue.  In doing so the Policy prevents a group of shareholders from taking advantage of a poorly attended shareholders meeting to impose their slate of directors on what could be a majority of shareholders unaware of such a possibility arising.  ...
[50]         The respondent notes that advance notice is supported by ISS (Institutional Shareholder Services Inc.) the leading independent advisory on good governance for shareholder meetings.  ISS favours advance notice of nominations to “ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposal.”
Although the decision does not appear to create new law, it does strongly affirm the directors' powers to act in the best interests of the company even when the particular action is not expressly prescribed by the Act or the articles.  In other words, as a director, error on the side of "I can do this".