ABSTRACT I INTRODUCTION II SHAREHOLDERS, DIRECTORS, AND THE CORPORATION Shareholder Voting Power Legal Strategy to Replace Directors and the Element of Surprise III ADVANCE NOTICE PROVISIONS The Mechanisms to Implement Advance Notice Provisions The Advantages of Advance Notice The Disadvantages of Advance Notice IV ADVANCE NOTICE PROVISIONS IN PRACTICE Mundoro Maudore V PROBLEMATIC USE AND DRAFTING OF ADVANCE NOTICE PROVISIONS Timing and Manner of Adoption Preventing Nominations Before a Specific Date VI BCE AND ADVANCE NOTICE PROVISIONS Reasonable Expectations Oppression, Unfair Prejudice, or Unfair Disregard VII THE PUBLIC INTEREST POWER The Nature and Scope of Public Interest Power The Tension Between Corporate and Securities Law The Public Interest Power and Problematic Uses of Advance Notice Provisions VIII CONCLUSION I INTRODUCTION
Advance notice provisions (1) require shareholders to give a company notice of director nominations and detailed information about nominees in advance of an annual or special meeting. (2) They can take the form of a policy adopted by the board of directors or an amendment to corporate by-laws or articles of incorporation. If a dissident shareholder (3) fails to comply with the advance notice provision, the directors can refuse the shareholder's nominations. (4)
Advance notice provisions can foster shareholder democracy by "allowing shareholders to fully participate in the director election process in an informed and effective manner",5 and can prevent a dissident from "[hiding] in the weeds" (6) to take advantage of a poorly attended meeting to elect the nominees of his or her choice. Arguably, however, directors can draft or implement an advance notice provision in a manner that is detrimental to the interests of shareholders. This article will argue that advance notice provisions have the potential to violate both corporate and securities law. (7)
Part II considers shareholders' statutory ability to vote on the corporation's directors and other important corporate matters. Further, Part II discusses the statutory mechanisms that shareholders can use to replace existing directors. Part III considers the mechanisms that directors can use to implement advance notice provisions, and discusses the advantages and disadvantages of the provisions to shareholders and directors.
Part IV discusses two recent court decisions that have upheld incumbent directors' use of advance notice provisions under corporate law: Northern Minerals Investment Corp v Mundoro Capital Inc (8) and Maudore Minerals Ltd v Harbour Foundation. (9) In particular, Part IV sets out the background of the disputes, the decision of each Court, and the events that followed each decision.
While advance notice provisions can be beneficial to shareholder democracy, directors may use advance notice provisions in a manner that harms the interests of shareholders. Part V suggests that advance notice provisions can have a deleterious effect on shareholders under several circumstances. For instance, directors may draft and implement advance notice provisions in a manner that effectively precludes shareholders from nominating directors at a meeting, or in a manner that reduces the chance that shareholders will elect a dissident shareholder's nominee.
Where an advance notice provision harms shareholders, the provision may be contrary to both corporate and securities law. Part VI argues that, although the Courts in Mundoro and Maudore did not strike down the advance notice provisions implemented by the directors, in the future, courts might invalidate such provisions when they are used by directors in a way that breaches the reasonable expectations of a dissident share-holder in a manner that is oppressive or unfairly prejudicial to his or her interests. In particular, when directors implement the provision after the last day on which the provision permits nominations ("cut-off date"), or when directors implement the provision close to the cut-off date and take steps to stall the announcement of the nomination, the directors' use of the advance notice provision may be oppressive and contrary to section 241 of the Canada Business Corporations Act (10) as interpreted by the Supreme Court of Canada in BCE Inc v 1976 Debentureholders. (11) Further, where a provision prohibits nominations prior to a specific date without reason, courts may apply the oppression remedy to eliminate the restriction.
In addition, the directors' use of an advance notice provision may be contrary to securities law. Securities legislation gives securities regulators the power to intervene when directors' actions are contrary to the public interest. (12) Part VII will argue that, in light of the increased use of advance notice provisions by Canadian corporations, (13) securities regulators should critically examine advance notice provisions, and do so on a case-by-case basis to determine whether an advance notice provision is contrary to the public interest. In particular, an advance notice provision may be abusive of shareholders and capital markets where the provision is used to either entrench management or constrain the fundamental rights of shareholders. Consequently, if left unchecked, the damage to shareholder democracy may lead to inefficient markets and a decline in investors' confidence in Canadian capital markets.
II SHAREHOLDERS, DIRECTORS, AND THE CORPORATION
Advance notice provisions have the potential to affect how shareholders exercise their right to vote and nominate directors. Therefore, before considering advance notice provisions, this article will examine some of the statutory mechanisms that give shareholders the ability to vote for directors and on other corporate matters, and to propose new corporate directors.
SHAREHOLDER VOTING POWER
Canadian corporate law provides shareholders with the right to change the board of directors and to amend the corporation's constating documents. This subsection of the article will consider shareholders' statutory right to determine the corporation's directors, and the effect of this right on directors' incentives to act in the best interests of the corporation. In addition, this subsection will consider shareholders' rights to control the terms of the "corporate contract" that governs the relationship between the directors, the shareholders, and the corporation.
(i) Changing the Board of Directors
Generally, a corporation has the capacity, rights, powers, and privileges of a natural person. (14) However, because a corporation is an artificial, juristic entity, (15) individuals must act on behalf of the corporation. By default, corporate law confers this responsibility on directors. Specifically, subject to a unanimous shareholder agreement, (16) the CBCA requires the directors to manage, or supervise the management of, the business and affairs of the corporation. (17) In addition, directors can appoint officers, and can delegate certain powers to the officers to allow them to manage the business and affairs of the corporation. (18)
Although the directors and officers manage the corporation, they are not the residual claimants of the corporation's assets. Section 24 of the CBCA provides that where a corporation has one class of shares, holders of those shares must have the right to vote at shareholder meetings, to receive dividends, and to receive the remaining property of the corporation on dissolution. (19) Further, section 106 of the CBCA explicitly bestows on shareholders the power to elect the directors. (20) From a corporate governance perspective, sections 24 and 106 of the CBCA can be thought of as providing shareholders with democratic rights and a financial interest in the corporation.
In short, the CBCA provides that directors manage the corporation and shareholders elect those directors. In giving directors and shareholders these distinct rights, the CBCA creates a separation of ownership and control. (21) As discussed by Adolf Berle & Gardiner Means in their seminal work, The Modern Corporation and Private Property, (22) directors and officers motivated by personal interests may not act in a manner that maximizes corporate value. (23) The divergent interests of management and shareholders can lead to agency costs, which consist of the costs that the principal and agent incur to ensure that the agent acts in the principal's best interests, as well as the costs of any residual divergence between the agent's decisions and the decisions that are in the best interests of the principal. (24) Thus, shareholders may incur costs where the actions of management do not align with the best interests of the corporation, and where the shareholders must take steps to minimize such misalignment.
However, corporate law and market mechanisms can control these divergent interests and agency costs. (25) Shareholders can minimize agency costs and maximize firm value by using their statutory right to replace directors--the ability of shareholders to replace directors should incentivize the directors to act in the best interests of the corporation. In other words, shareholders' right to replace directors is "intended to render the directors accountable to shareholders". (26)
Although the ability to change the board of directors can independently influence the directors to act in the best interests of the corporation, the ability of shareholders to replace directors bolsters other market mechanisms that control agency costs. For example, the "market for corporate control" (27) relies on the ability of shareholders to determine the board of directors. (28) The market for corporate control operates by incentivizing an investor to acquire control of a mismanaged corporation and replace existing management, (29) because the share price of a mismanaged corporation should increase when new directors replace inefficient directors. (30) This financial incentive is dependent on the shareholder's...