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Protecting the Fundamental Rights of Shareholders

Koh v Ellipsiz Communications Ltd. 2017 ONSC 3083

The recent Ontario Superior Court of Justice decision,Koh v Ellipsiz Communications Ltd, 2017 ONSC 3083 [ Ellipsiz], is a noteworthy example of the tightrope Canadian courts often walk when dealing with disputes between shareholders and directors of corporations. On one hand, directors and officers of corporations need the flexibility and freedom to make difficult business decisions; however, too much discretion can lead to the erosion of the fundamental rights of shareholders. In this decision, the court attempted to uphold the rights of shareholders, by protecting their right to call a meeting, without making a determination concerning the merits of the ongoing dispute between the parties.

The appellant, Tat Lee (Michael) Koh, was the largest shareholder of Ellipsiz Communications Ltd. (“ECL”) holding 42% of the outstanding shares. On August 30, 2016, Koh submitted a requisition seeking a shareholders’ meeting under section 105(1) of the Business Corporations Act, RSO 1990, c B.16 [OBCA], which states:

The holders of not less than 5 per cent of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition.

The stated purpose of the meeting was to consider two resolutions. The first was the removal of specified directors, and the second was the election of three new directors if the first resolution was successful.

The board refused to call the meeting, stating that the primary purpose of the meeting was the redressing of a personal grievance against the board. They relied on section 105(3) of the OBCA, which gives several exceptions to the right of a shareholder mentioned in section 105(1) to call a meeting. One of those exceptions is where “it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors.”

The Business Corporations Act, RSS 1978, c B-10 [SBCA], in Saskatchewan, contains nearly identical sections to those in the OBCA that the court dealt with in this decision. Section 137(1) of the SBCA gives the holders of not less than five per cent of the voting shares of the corporation the right to call a meeting and section 137(3) lists the exceptions to this right. The relevant excluded matter in the SBCA at section 131(5)(b) states:

it clearly appears that the proposal is submitted by the shareholder primarily for the purpose of enforcing a personal claim or redressing a personal grievance against the corporation or its directors, officers or security holders, or primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.

Both the OBCA and the SBCA give the directors of a corporation the discretion to deny any shareholder meeting proposals that deal primarily with personal claims or grievances.

The Superior Court of Justice disagreed with the directors’ decision to deny Koh’s request for a shareholder meeting. Justice Nordheimer emphasized that a dissident shareholder’s ability to call for a meeting is a “fundamental right” when it comes to the governance of a corporation.

Keeping this principle in mind, the court held that the board had failed to meet the very high threshold that is necessary to refuse a requisition of a shareholder meeting. In order to fall under one of the exceptions to this shareholder right, the directors must prove that the shareholder’s purpose for calling the meeting was primarily a personal grievance and not just a personal interest. The court stated that an indicator of a personal grievance “is that the subject matter of the grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or for that matter to the griever’s role as shareholder.”

Here, the court felt that the board had failed to establish that the appellant was pursuing a purely personal grievance that had no real relationship to the affairs of the company. It again emphasized that this is a high bar to meet because the shareholder’s right to call a meeting is a fundamental one and courts should not displace that right lightly. To further this point Nordheimer J. stated, “any doubt regarding the application of the exception should be resolved in favour of the meeting being held.”

The court held that despite the personal tone Koh had used in his complaints against the board, he had a legitimate disagreement with several of the directors regarding the financial management of the company. Some of the issues were personal, but this was not primarily a personal grievance and as a holder of more than five per cent of the voting shares in the corporation, Koh had a fundamental right to have these issues decided at a meeting.

The Ontario Superior Court of Justice has set an extremely difficult burden for directors of a corporation to meet if they wish to refuse to call a meeting because its primary purpose is a prohibited matter. The Court held that the directors must prove that the purpose of the meeting has no direct or real connection to a valid business purpose and if they uncertain whether the exception for an invalid purpose is applicable, the directors should error on the side of caution and call the meeting.

This decision is a victory for the dissident shareholder who wishes to exercise his or her statutory rights. However, it could become a headache for directors who must respect the “fundamental” rights of all shareholders - even those with a minority or different view of the company’s affairs.