COURT OF APPEAL FOR ONTARIO
MOLDAVER, CRONK and LaFORME JJ.A.
B E T W E E N :
INTERNATIONAL BASLEN ENTER-PRISES LIMITED
Michael B. Miller for the appellant
Applicant (Respondent)
- and -
JOHN L. KIRWAN
Colin A. Brown for the respondent
Respondent (Appellant)
Heard: January 24, 2006
On appeal from the judgment of Justice John H. Jenkins of the Superior Court of Justice dated March 29, 2005.
CRONK JA:
I. Introduction
1This litigation arises from a dispute between two competing factions regarding the composition and control of the board of directors of International Baslen Enterprises Limited (“Baslen”), an Ontario corporation, and its shareholdings. The appellant John L. Kirwan appeals from the judgment of Jenkins J. of the Superior Court of Justice dated March 29, 2005 by which, among other things, declaratory relief was granted regarding Kirwan’s claimed status as a director, shareholder and administrator of Baslen and the validity of various share transactions and corporate governance matters involving Baslen and its subsidiary, 2629-2482 Quebec Inc. (“Quebec Inc.”).
2For the reasons that follow, I would dismiss the appeal.
II. Discussion
(1) Kirwan’s Status as a Director of Baslen
3Kirwan challenges the application judge’s finding that Kirwan resigned as a director of Baslen on May 29, 2002 and that this resignation remains effective. There is no basis upon which to conclude that this factual finding is tainted by palpable and overriding error. To the contrary, it is amply supported by the record before the application judge, including Baslen’s signature on a letter of resignation dated May 29, 2002, his express acknowledgement of his resignation in his correspondence to Pieter Buiskool (a non-resident director of Baslen) dated June 21, 2002, correspondence from Baslen’s then corporate solicitor to Buiskool dated July 2, 2002 and Baslen’s 2002 annual corporate returns filed with regulatory authorities.
4Although Kirwan claims that he withdrew his resignation after May 29, 2002 and that it was never formally accepted by Baslen’s board of directors, thereby ostensibly reviving his status or reinstating him as a director, this argument is unsustainable in law. After May 29, 2002, Kirwan was neither re-elected as a director by the shareholders of Baslen nor re-appointed as a director to fill an existing vacancy on the board in accordance with applicable procedures under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”). Moreover, under s. 121(2) of the OBCA, Kirwan’s resignation became effective immediately, in accordance with its terms, on May 29, 2002, the same day that it was tendered by Kirwan and received by the president of Baslen and Baslen’s corporate solicitor on behalf of the company.
5Accordingly, I would not give effect to this ground of appeal.
(2) Buiskool’s Status as a Director of Baslen
6The application judge found that all of the Canadian-resident directors of Baslen, including Kirwan, resigned as directors in May 2002, leaving Buiskool, a non-Canadian resident, as the only remaining director of the company. Kirwan argues before this court that Buiskool lost his status as a director by operation of s. 118(3) of the OBCA in consequence of the resignation of the other directors. This submission misconceives the governing provisions of the OBCA.
7Section 118(1) of the OBCA outlines the requisite qualifications of directors and s. 121(1) details the circumstances in which a director ceases to hold office. It is not suggested that Buiskool lost his status as a director under either of these sections or that his original election as a director was defective. Moreover, s. 118(3) itself does not provide for the loss or termination of status as a director. Rather, it is directed at the residency requirements for the majority of the directors of a corporation. Under s. 118(3) and ss. 115(1) and 126(6) of the OBCA, where only one director of a corporation holds office, as transpired in this case after May 29, 2002, that director is precluded from conducting the business and affairs of the corporation until a quorum of the board is restored. This does not mean, however, that the status of the sole director is forfeited upon the resignation of those directors who met the Canadian residency requirements of the OBCA.
(3) Kirwan’s Status as Administrator of Baslen
8Kirwan relies on s. 115(4) of the OBCA to contend that he was appointed by a shareholder of Baslen as the administrator of Baslen effective sometime during the period June to November 2002. This argument is untenable. Section 115(4) has no application unless a company is without any directors. In this case, Buiskool was a director of Baslen at the time of Kirwan’s purported appointment under s. 115(4). Thus, resort to s. 115(4) was unavailable and the appointment was of no force or effect.
(4) Share Transactions Involving Baslen
9On July 31, 1991, the Ontario Securities Commission issued a cease-trading order (the “CTO”) in respect of Baslen. The Alberta Securities Commission followed suit about two years later. It is undisputed that the CTO remains in place and that it has never been varied or revoked pursuant to the Securities Act, R.S.O. 1990, c. S. 5.
10The CTO, while in effect, precludes any “trading” or “trade” in the shares of Baslen, as those terms are defined under the Securities Act. Counsel for Kirwan properly acknowledged before this court that the issuance of shares from Baslen’s treasury comes within the definitions of “trading” and “trade” under the Securities Act. Kirwan argues, however, that he is a shareholder of Baslen because shares were issued to him on account of debts owed to him by Baslen and that share transactions of this kind are excepted from the definition of “trading” or “trade” under s. 1(1) of the Securities Act.
11This argument must be rejected for several reasons. First, there is no suggestion that Kirwan was a shareholder of Baslen prior to the CTO.
12Second, the statutory exception relied upon by Kirwan applies only to the “transfer, pledge or encumbrance of securities for the purposes of giving collateral for a debt made in good faith”. The share transactions in question involved the issuance of new shares from Baslen’s treasury, rather than the “transfer, pledge or encumbrance” of existing shares. Even if the issuance of new shares from treasury could be said to be a “transfer” of shares from treasury, the exception only applies to the delivery of shares for the purpose of providing collateral for a debt, rather than satisfying or discharging a debt.
13Third, the record before the application judge indicated that the debt said to be owed to Kirwan by Baslen had been repaid. Indeed, Kirwan himself admitted such repayment in his affidavit filed in this litigation. In addition, to the extent that the alleged “debt” related to remuneration for Kirwan as a director of Baslen, the payment of such remuneration by the issuance of shares, even if properly approved by Baslen’s shareholders in accordance with the OBCA and Baslen’s bylaws, could not occur in the face of the CTO. Finally, there was evidence before the application judge that the issuance of Baslen shares to Kirwan was never properly approved by Baslen’s shareholders, as required under the OBCA and Baslen’s bylaws.
14The application judge held that the issuance of Baslen shares following the CTO was invalid. This holding is unassailable. Unless and until the CTO is varied or revoked, any purported share transactions involving Baslen’s shares, including transactions forming part of an alleged “stock consolidation plan”, have no validity unless they constitute exempt transactions under the Securities Act or the terms of the CTO. This does not apply here.
(5) Buiskool’s Standing to Call a Shareholders Meeting
15Kirwan also challenges the application judge’s finding that Buiskool, as the only remaining director of Baslen, has standing to call a meeting of Baslen’s shareholders to elect directors, notwithstanding Buiskool’s non-residency status. This attack must also fail.
16Kirwan does not dispute that Buiskool is a shareholder of Baslen. I have already concluded that the application judge was correct to find that Buiskool was also the remaining director of Baslen after May 29, 2002. Section 124(3) of the OBCA provides that if there is no quorum of directors, the directors then in office are obliged to call a special meeting of shareholders to fill the vacancy. If they fail to so do, the meeting may be called by any shareholder. Baslen’s bylaws contain a provision mirroring s. 124(3) of the OBCA. Thus, both in his capacity as the remaining director of Baslen after May 2002 and in his capacity as a shareholder of the company, Buiskool enjoys standing to call a shareholders meeting for the purpose of electing new or replacement directors of Baslen.
(6) Validity of June 13, 2003 Shareholders Meeting
17Kirwan argues that the application judge erred in law by concluding that a Baslen shareholders meeting initiated by Buiskool and held on June 13, 2003, at which a new board of directors was elected, was validly constituted. This is an inaccurate characterization of the application judge’s holdings concerning this meeting.
18The application judge accepted, and the record indicates, that there were irregularities in the calling of the June 13 meeting. He held that the meeting was “defective” by not “fatal[ly]” so. He properly recognized that efforts had been made by Buiskool and others to call the meeting in conformity with Baslen’s bylaws and the OBCA but that these efforts were impeded by Kirwan’s failure to return Baslen’s corporate records to Buiskool at the relevant times. The application judge then concluded that Buiskool “ought to convene a special shareholders meeting to elect a Board of Directors and Officers of Baslen as soon as possible”. The application judge did not grant a declaration of validity concerning the June 13 meeting, nor does his judgment contain such a declaration.
19I see no error in the application judge’s holdings on this issue. In my view, Buiskool has standing under the OBCA to call a special shareholders meeting. It is, of course, open to the shareholders of Baslen at such a meeting to elect a new slate of directors and for the new directors, if so advised, to ratify to the extent permitted by law, or approve anew, actions taken on Baslen’s behalf by the directors sought to be elected at the June 13, 2003 meeting. Indeed, it may well be that this has already occurred. However, there is no properly admissible evidence before us on this issue.
20I am also not persuaded that there was any irreparable defect in the commencement of the application in this case. Both sides brought applications under s. 107 of the OBCA to determine controversies between them concerning the directors of Baslen. An application under s. 107 of the OBCA may be brought by a corporation, shareholder or director. Although the applications were brought in the name of Baslen and Kirwan, Buiskool was clearly involved in Baslen’s application. It is open to the shareholders and future directors of Baslen, if so advised, to ratify the steps taken in respect of Baslen’s application to the extent permitted by law.
21In the result, on these facts, I agree that the validity of the election of the board of directors of Baslen at the June 13 shareholders meeting is questionable. On the other hand, this record does not support Kirwan’s contention before the application judge that between June and December 2002 or thereafter any valid meeting of the shareholders or directors of Baslen that included Kirwan took place. To the contrary, Kirwan was not a shareholder or, after May 29, 2002, a director of Baslen. Similarly, Kirwan cannot rely on the purported election of alternative directors at a shareholders meeting called for December 19, 2003. That meeting was precluded by court order and, in any event, could not validly have been called by Kirwan.
22In all the circumstances, the application judge’s direction that Buiskool convene a special shareholders meeting as soon as possible was sensible and practical. It was also well within his broad discretion on an application under s. 107 of the OBCA to so order.
(7) Share Transactions and Governance Matters Involving Quebec Inc.
23I reach a similar conclusion regarding the application judge’s comments concerning the share transactions and governance matters involving Quebec Inc. There was clearly a dispute between the parties regarding these matters and the apparent actions of persons purporting to be directors of Baslen in relation to Quebec Inc. after the CTO. For the reasons earlier given, the record amply supports the application judge’s suggestion that the attempt by Kirwan and his supporters to change the shareholdings in Quebec Inc., while purporting to be directors of Baslen, could be found to be ineffective, given the CTO. Consideration of such issues by Baslen’s board of directors, once reconstituted, appears to be both necessary and prudent.
III. Disposition
24Accordingly, for the reasons given, I would dismiss the appeal. The respondent is entitled to its costs of the appeal on the partial indemnity scale, fixed in the total amount of $7,500.00, inclusive of disbursements and GST.
RELEASED: January 30, 2006
“E.A. Cronk”
Signed “E.A. Cronk J.A.”
“I agree: M.J. Moldaver J.A.”
“I agree: H.S. LaForme J.A.”