Advance Notice Policies – Defence Against the AGM Ambush
In Northern Minerals Investment Corp. v. Mundoro Capital Inc. (2012 BCSC 1090), the British Columbia Supreme court has affirmed the ability of company directors in British Columbia to institute an “Advance Notice Policy”, which requires that a company be notified in advance of any director nominees who are put forward for election at the company’s annual general meeting (“AGM”). Instituting an Advance Notice Policy before an AGM is the best defence available to public companies against an “ambush” challenge to the incumbent directors, where one or more significant shareholders seek to nominate a competing slate of directors from the floor at the AGM, without providing any advance notice of its intention to do so.
Under British Columbia corporate law, absent an Advance Notice Policy, any shareholder or proxyholder at an AGM may nominate from the floor one or more nominees to stand for election as directors (the “Competing Slate”). In the case of public companies, applicable securities laws provide that proxies may not be used to vote for any director nominee who has not been named in an information circular for the AGM, however any directly-registered shareholder attending the meeting will be able to vote for the Competing Slate. If the directly-registered shareholders voting for the Competing Slate hold more shares than the shareholders voting in person or by proxy for the incumbent directors, the Competing Slate will be elected as the directors of the company, and generally the Competing Slate of directors will effect a full management change. This is the essence of the “ambush” takeover of the company at an AGM. An “ambush” is often employed when one or more shareholders holds a directly-registered block of shares which may not be large enough to unseat the incumbent directors in a full proxy battle, but may be sufficient to outnumber the reduced number of shareholders who vote in person or by proxy at what is anticipated to be an uncontested AGM.
In the Mundoro Capital case, Northern Minerals Investment Corp. was a significant shareholder of Mundoro Capital Inc., planning an “ambush” to nominate a competing slate of directors from the floor at an upcoming AGM of Mundoro. The directors of Mundoro likely had some suspicions of Northern Mineral’s plan, because they: (a) instituted an Advance Notice Policy, which provided that any shareholders wishing to nominate directors at the AGM must provide advance notice of such nomination by a fixed date; and (b) postponed the AGM by two months. Northern Minerals commenced an action in the Supreme Court of British Columbia, asking for a declaration that the Advance Notice Policy was unenforceable, and seeking an order preventing Mundoro from postponing the AGM. Mr. Justice Punnett dismissed Northern Minerals’ petition, and found that both the postponement of the AGM and the institution of the Advance Notice Policy were both within the powers of the directors, and that the Advance Notice Policy serves to ensure that all shareholders are made aware that a proxy contest exists, which is in the best interests of a company and its shareholders.
The Mundoro Capital case has affirmed in British Columbia that Advance Notice Policies constitute a legitimate means of defending against an “ambush” at an AGM by one or more significant shareholder seeking to elect a competing slate of directors without providing notice to the company and its other shareholders that a proxy context will take place.
In cases where there is not an immediate threat of an “ambush” at an AGM, we recommend that the board of directors of companies institute an Advance Notice Policy which is subsequently ratified by the shareholders of the company at a shareholder meeting. Proxy advisory services will generally support Advance Notice Policies, provided the time period of the advance notice meets their requirements. Following the Mundoro Capital case, where there is considered to be a threat of an imminent ambush, the Advance Notice Policy may be adopted by the board of directors of a British Columbia company.
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