Baylin Technologies Inc. v. Gelerman

Ontario Reports Court of Appeal of Ontario Doherty, Nordheimer and Harvison Young JJ.A. January 26, 2021 154 O.R. (3d) 65 | 2021 ONCA 45

Case Summary

Contracts — Purchase and sale of a business -- Asset purchase agreement stipulating that respondent was to be nominated for election to appellant's board of directors and provide consulting services for two years — Respondent refusing to submit resignation as required by results of vote taken under majority voting policy and seeking release of shares as payment of consulting fees — Appellant claiming right to set off indemnity claims in separate proceedings against respondent's claim — Application judge finding no right of set-off — Appeal allowed — Technical requirements of legal and equitable set-off did not apply to contractual set-off — Shares delivered to trustee but not yet released to respondent did not constitute payment.

Corporations — Directors — Indemnity — Removal of directors — Resignation — Asset purchase agreement stipulating that respondent was to be nominated for election to appellant's board of directors and provide consulting services for two years — Respondent adopting majority voting policy — Respondent refusing to submit resignation as required by results of vote taken under new policy — Application judge finding that majority voting policy did not comply with TSX requirements and was drafted with the purpose of removing respondent as director — Application judge setting aside majority voting policy — Application judge erred in concluding that majority voting policy did not comply with TSX requirements and in finding oppression.

Corporations — Oppression — Asset purchase agreement stipulating that respondent was to be nominated for election to appellant's board of directors and provide consulting services for two years — Respondent adopting majority voting policy — Respondent refusing to submit resignation as required by results of vote taken under new policy — Application judge finding that majority voting policy did not comply with TSX requirements and was drafted with the purpose of removing respondent as director — Application judge setting aside majority voting policy — Application judge erred in concluding that majority voting policy did not comply with TSX requirements and in finding oppression.

An asset purchase agreement stipulated that G was to be nominated for election to B's board of directors and that B, at each of the 2018 and 2019 annual general meetings of shareholders, would honestly and in good faith assist G to obtain the votes necessary to secure membership on the board. It was a condition to the closing of the asset purchase agreement that G provide consulting services to B for two years, with fees to be paid by way of eight share certificates delivered to a trustee and released in eight quarterly instalments. B was listed on the Toronto Stock Exchange (TSX) and as such had to comply with the TSX Company Manual to maintain its listing. Following another acquisition, B ceased to have a majority shareholder and was therefore required to adopt a majority voting policy to comply with TSX rules. G, as a director of B, voted in favour of the policy which stated that if a director received more 'withheld' votes than 'for' votes at any shareholders meeting to vote on the uncontested election of directors, the director had to immediately resign. The board was required to accept the resignation absent exceptional circumstances. As time passed after completion of the asset purchase agreement, difficulties arose between G and the chairman of the board of B, who was also the sole director and officer of B's largest shareholder. At the 2019 annual general meeting, G received only 29% of the eligible votes for his re-election. B's majority shareholder and others withheld their votes. G did not submit his resignation as required by the majority voting policy, so the board never considered whether it would accept the resignation. Instead, B and its majority shareholder applied for an order requiring G to tender his resignation as director. G brought an application for a declaration that he was not required to resign because of alleged oppressive conduct, and for an order directing the release of certain shares for consulting fees for G and his wife. B had asserted indemnity claims in separate proceedings, and claimed a right to set off its indemnity claims against five share certificates that had been delivered to the trustee under the consulting agreement but not yet released to G and his wife. The applications were heard together. The application judge found that B's majority voting policy did not comply with the TSX voting majority requirement and that the policy had been introduced for reasons other than compliance with the TSX requirement. The judge set aside the majority voting policy. The judge also denied the claim for set-off, finding that delivery of the share certificates to the trustee constituted payment by B of amounts due under the consulting agreement such that those amounts were no longer amounts otherwise payable under the asset purchase agreement to which the indemnity claim could attach. B and its majority shareholder appealed.

Held, the appeal should be allowed.

The appeal was not rendered moot by the fact that G remained as a director of B. The judge's decision setting aside the majority voting policy remained binding on B. Further, the case raised matters of public importance whose resolution would be in the public interest, and as such fell within a recognized exception to the strict application of the mootness principle.

The application judge erred in concluding that B's majority voting policy did not comply with the TSX policy on majority voting. The judge held that votes withheld were not votes cast and therefore did not count in the election results. However, the TSX policy was clear that votes withheld were votes against a director. To conclude otherwise would mean that any director receiving even a single vote in favour would have achieved more than 50% plus one of the votes cast. The purpose behind adopting a majority voting policy for publicly traded companies was to provide a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors. The application judge's misunderstanding led to his second error, that B's majority voting policy did not comply with TSX policy because the B policy stipulated only three situations that would constitute exceptional circumstances. However, the TSX policy did not stipulate what would or would not constitute exceptional circumstances. Rather, the TSX policy left the determination of exceptional circumstances to be dealt with on a case-by-case basis and did not preclude a corporation from stipulating, in advance, what it would consider as exceptional circumstances. For the same reasons, the application judge erred in finding B's policy to be non-compliant because it did not contain a specific exception regarding commercial agreements regarding the composition of the board, which was simply one example provided by the TSX of what might constitute exceptional circumstances.

The application judge made a palpable and overriding error respecting his finding of oppression. He concluded that G had a reasonable expectation to be a director for two years and that B's actions in adopting the majority voting policy were misleading and false as the policy was drafted for the purpose of removing G as director. However, reasonable expectations were to be viewed on an objective, not subjective, basis. Although G might have believed that he would remain a director for two years, that expectation was not objectively reasonable by the time of the 2019 annual general meeting in light of the difficulties in his relationship with B's chairman. Further, G had no commitment from B that he would be a director for the two-year period. Rather, all he had was an undertaking from B to act honestly and in good faith in assisting G to obtain the necessary votes. G knew, or should have known, that B's chairman was obliged to act as he thought best in exercising his duties as the sole director and officer of the majority shareholder. The judge's conclusion on oppressive conduct was driven by his errors respecting the majority voting policy. The judge drew an adverse inference against B for not revealing legal advice it had received regarding the presentation and passage of the majority voting policy, even though the judge acknowledged that such advice was clearly privileged. The judge also concluded that the majority voting policy was passed to remove G as a director, but the basis for that conclusion was the judge's erroneous understanding of background to, and need for, the majority voting policy.

B should have been permitted to set off the share certificates that had not been released, representing amounts paid but not yet due, following B's notice of its indemnification claims at the time of the application. The amounts due under the consulting agreement were not paid by B simply by delivering the share certificates to the trustee. The whole structure of the consulting agreement was that the amounts due under it were to be paid out over two years. Five share certificates were still held by the trustee so the amounts represented by those certificates remained payable. The technical requirements of legal and equitable set-off did not apply to contractual set-off. Considering the ordinary meaning of the words of the asset purchase agreement and the consulting agreement in context, the common-sense interpretation of the provisions required the release of each individual share certificate on a particular date to represent an actual payment in consideration of the services performed.

B's majority voting policy was declared to be in accordance with the TSX's majority voting requirement and was to remain in force. It was ordered that G was required to have submitted his resignation to B's board for consideration following the 2019 annual general meeting. It was further ordered that the remaining share certificates were not to be released from trust pending the determination of B's separate indemnity claims, the consent of the parties, or further order of the court.

Cases Cited

• BCE (para. 51), consd

Other cases referred to

• BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 301 D.L.R. (4th) 80, 383 N.R. 119, J.E. 2009-43, 52 B.L.R. (4th) 1, 71 C.P.R. (4th) 303, 172 A.C.W.S. (3d) 915, EYB 2008-151755, 2008 CCAN para. 10,065, 2008 SOACQ para. 10,147, 2009 CCSG para. 51,112, 2009 BCLG para. 78,675, 2009 OCLG para. 51,488, 2009 CCLR para. 200,832, 2009 CSLR para. 900-288, 2009 ACLG para. 79,251
• Borowski v. Canada (Attorney General), [1989] 1 S.C.R. 342, [1989] S.C.J. No. 14, 57 D.L.R. (4th) 231, 92 N.R. 110, [1989] 3 W.W.R. 97, J.E. 89-499, 75 Sask. R. 82, 47 C.C.C. (3d) 1, 33 C.P.C. (2d) 105, 38 C.R.R. 232, 7 W.C.B. (2d) 61, 1989 CCAN para. 10,009
• Caisse populaire Desjardins de l'Est de Drummond v. Canada, [2009] 2 S.C.R. 94, [2009] S.C.J. No. 29, 2009 SCC 29, 309 D.L.R. (4th) 323, 389 N.R. 199, J.E. 2009-1209, [2009] 4 C.T.C. 330, 2009 D.T.C. 5106, 2009 D.T.C. 5107, 15 P.P.S.A.C. (3d) 35, EYB 2009-160527
• Casurina Limited Partnership v. Rio Algom Ltd., [2004] O.J. No. 177, 181 O.A.C. 19, 40 B.L.R. (3d) 112, 128 A.C.W.S. (3d) 491
• Dresser Industries Inc. v. Vos, [1985] A.J. No. 863, 60 A.R. 226, 32 A.C.W.S. (2d) 235 (Master)
• Holt v. Telford, [1987] 2 S.C.R. 193, [1987] S.C.J. No. 53, 41 D.L.R. (4th) 385, 78 N.R. 321, [1987] 6 W.W.R. 385, J.E. 87-1005, 54 Alta. L.R. (2d) 193, 81 A.R. 385, 37 B.L.R. 241, 21 C.P.C. (2d) 1, 46 R.P.R. 234, 6 A.C.W.S. (3d) 168
• Mental Health Centre Penetanguishene v. Ontario, [2010] O.J. No.1044, 2010 ONCA 197, 260 O.A.C. 125
• Resolute FP Canada Inc. v. Ontario (Attorney General), [2019] S.C.J. No. 60, 2019 SCC 60, EYB 2019-333205, 29 C.E.L.R. (4th) 1, 96 B.L.R. (5th) 1, 444 D.L.R. (4th) 77

Statutes referred to

• Business Corporations Act, R.S.O. 1990, c. B.16 [as am.], ss. 248 [as am.], 255
• Courts of Justice Act, R.S.O. 1990, c. C.43, s. 6(2) [as am.]
• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 224(1.3) [as am.]

Rules and regulations referred to

• General, R.R.O. 1990, Reg. 62, s. 27

Authorities referred to

• McGuinness, Kevin, Canadian Business Corporations Law, 3rd ed. (Toronto: LexisNexis, 2017)
• Palmer, Kelly, The Law of Set-Off in Canada (Aurora: Canada Law Book, 1993)

APPEAL from orders setting aside a majority voting policy and denying a claim for set-off.

Steve J. Tenai and Miranda Spence, for appellants. Jason Wadden and Jesse-Ross Cohen, for respondents. Linda Plumpton, James Gotowiec and Adrienne Oake, for intervenor, Toronto Stock Exchange. Susan Kushneryk and Eric Morgan, for intervenor, Canadian Coalition for Good Governance.

The judgment of the court was delivered by

NORDHEIMER J.A.: —

A. Overview

[1] The appellants, Baylin Technologies Inc. and 2385796 Ontario Inc. ("2385796"), brought an application before the Ontario Superior Court of Justice (Commercial List). They sought an order requiring David Gelerman to tender his resignation as a director of Baylin, as required under Baylin's majority voting policy, along with other declaratory relief.

[2] Prior to the appellant's application, David Gelerman and the corporate respondents had brought an application seeking a declaration that Gelerman was not required to tender his resignation because of alleged oppressive conduct by the appellants and others, and for an order directing the release of certain shares held by Spacebridge's lawyers, as trustees, for consulting fees pursuant to a consulting agreement between Baylin and Spacebridge (the "Consulting Agreement").

[3] The applications were heard together on October 29, 2019 and decided in a single set of reasons released on January 23, 2020.

B. Background

(1) The Asset Purchase Agreement

[4] Pursuant to an asset purchase agreement in January 2018 (the "APA"), Baylin acquired from Spacebridge and its affiliates the undertaking and assets of Spacebridge's satellite and radio frequency, terrestrial microwave and antenna equipment and services business. Gelerman was the founder of Spacebridge and its President and CEO.

[5] Negotiations over the APA lasted several months following the signing of a non-binding indication of interest between Baylin and Spacebridge at the end of August 2017. As part of the indication of interest, a support letter was delivered by 2385796 (Baylin's majority shareholder) to Baylin in early August 2017 stating that it would be prepared to support the proposed transaction between Baylin and Spacebridge (formerly called Advantech Wireless Inc.). The indication of interest provided for Gelerman to serve in a senior consulting role reporting directly to Baylin's President and CEO.

[6] The APA was eventually negotiated and signed on January 17, 2018. Paragraph 4.16 of the APA is of particular relevance to the issues raised. It reads, in part:

Gelerman Director Nomination

(a) Subject to Gelerman meeting, at all applicable times, the requirements of the TSX and Applicable Laws, Baylin shall:

(i) following the Closing Date request of its board of directors to appoint Gelerman to such board of directors, to hold such position until the first annual general meeting of holders of Baylin Common Shares that occurs following the Closing; and

(ii) at each of the 2018 and 2019 annual general meetings of holders of Baylin Common Shares, Baylin shall nominate Gelerman for election to its board of directors and shall honestly and in good faith, subject to Applicable Law, assist Gelerman to obtain the votes necessary to secure membership on the board of directors of Baylin.

(2) The Consulting Agreement

[7] It was a condition to the closing of the APA that Baylin enter into the Consulting Agreement with Spacebridge. The Consulting Agreement provided for consulting services to be provided by David Gelerman, in his capacity as Chief Technology Officer, and Stella Gelerman, in her capacity as Special Advisor, to Baylin or its affiliates for a term ending on December 31, 2019. The Consulting Agreement provided for annual payments of $1.25 million for an aggregate fee over the two-year term of the Consulting Agreement of $2.5 million, paid equally in cash and Baylin shares.

[8] More specifically, the Consulting Agreement provided for the payment of the consulting fees as follows:

Base Fee. Baylin shall pay to the Consultant a fee of $1,250,000 (Canadian Dollars) per annum for the duration of the Term (the "Fee") in respect of the Consulting Services. The Fee shall be paid as follows:

(a) by delivery to, or to the direction of, the Consultant on the final business day of each March, June, September and December that occurs in the 24 month period following the Effective Date, the sum of $156,250; and

(b) by delivery to Davies Ward Phillips & Vineberg LLP ("DWPV"), as trustee for the Consultant, on the Effective Date, such number of common shares in the capital of Baylin (the "Baylin Common Shares") as is equal to:

(1) one million two hundred and fifty thousand dollars ($1,250,000); divided by,

(2) the volume weighted average price of the Baylin Common Shares traded on the facilities of the Toronto Stock Exchange during the five (5) trading day period ending on the last trading day prior to the Effective Date,

which shares shall be held by DWPV and released to the Consultant in accordance with Section 3.2.

[9] Section 3.2 of the Consulting Agreement provided as follows:

Restricted Shares. On the date hereof, Baylin shall deliver the Baylin Common Shares referred to in Section 3.1(b) in eight (8) equal parts, each part to be issued on a separate share certificate. The eight (8) share certificates shall be released by DWPV and delivered to the Consultant, as to one certificate in each instance, at each of the Effective Date and thereafter on the final business day of each March, June, September and December that occurs in the 20 month period following the Effective Date.

(3) Majority Voting Policy

[10] Baylin was listed on the Toronto Stock Exchange ("TSX"). The TSX maintains rules for listed companies, which are set out in the TSX Company Manual ("TSX Manual"). Issuers such as Baylin must comply with the TSX Manual in order to maintain their listing on the TSX.

[11] The TSX first proposed adding a majority voting requirement to the TSX Manual in September 2011. The effect of a majority voting requirement is that it requires a person, who has been elected as a director, to nonetheless submit his/her resignation, if s/he does not receive 50 per cent +1 of the total votes cast. As further explained below, this requirement was necessary to avoid the effects of the plurality voting requirements that are currently contained in corporate statutes, such as the Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA").

[12] The stated rationale for the addition of a majority voting requirement was, in part, that "majority voting policies support good governance by providing a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors". At the time, the TSX did not propose to make majority voting mandatory. In October 2012, the TSX issued a Notice of Approval for the amendments. The amendments became effective on December 31, 2012.

[13] Subsequently, the TSX decided that it would make the majority voting requirement mandatory for issuers that did not have a majority shareholder. The TSX issued a Notice of Approval for the mandatory Majority Voting Requirement in February 2014. The amendment became effective on June 30, 2014. Section 461.3 of the TSX Manual requires every issuer to adopt a majority voting policy that provides, in part:

(a) any director must immediately tender his or her resignation to the board of directors if he or she is not elected by at least a majority (50% +1 vote) of the votes cast with respect to his or her election;

(b) the board shall determine whether or not to accept the resignation within 90 days after the date of the relevant security holders' meeting. The board shall accept the resignation absent exceptional circumstances.

[14] The exception for "exceptional circumstances" is an issue in this appeal. As part of its process for implementing mandatory majority voting, the TSX had attempted to provide some guidance on what would constitute exceptional circumstances. For example, the TSX Staff noted in a 2017 Staff Notice that they would contact an issuer to discuss the exceptional circumstances that are present when a board determines to reject a director's resignation. The TSX said that each situation would be reviewed on a case-by-case basis, taking into account the unique factors applicable to each issuer. The 2017 Staff Notice stated that exceptional circumstances would be expected to meet a high threshold. It provided some examples of what might meet that threshold. One of the examples was that an issuer "would not be compliant with . . . commercial agreements regarding the composition of the Board as a result of accepting the Subject Director's resignation". However, the 2017 Staff Notice did not require issuers to incorporate any or all of the listed circumstances into their own policies.

[15] As a result of another acquisition made by Baylin in June 2018, which was after the Spacebridge acquisition, Baylin ceased to have a majority shareholder. It was therefore required to adopt a Majority Voting Policy in order to comply with the TSX rules.

[16] Baylin's majority voting policy was unanimously approved by Baylin's Board of Directors in mid-March 2019. David Gelerman was a director of Baylin and voted in favour of the policy. Baylin's majority voting policy states that, "[i]f a director receives more 'withheld' votes than 'for' votes at any shareholders meeting where shareholders vote on the uncontested election of directors, the director must immediately submit to the Board his or her resignation, to take effect upon acceptance by the Board".

[17] In terms of exceptional circumstances for not accepting a director's resignation, the Baylin majority voting policy said:

In determining whether to accept the resignation, the Board will consider various matters including, but limited to, if: (I) acceptance of the resignation would result In the Company not being compliant with its Articles, By-laws, and securities law requirements regarding the composition of the Board; (II) the resigning director is a key member of an established, active special committee which has a defined term or mandate and accepting the resignation of such director would jeopardize the achievement of the special committee's mandate; or (III) majority voting was used for a purpose inconsistent with the policy objectives of the Toronto Stock Exchange.

[18] It will be noted that the Baylin majority voting policy did not expressly include non-compliance with commercial agreements regarding the composition of the Board as an exception to its policy.

(4) The 2019 Annual General Meeting

[19] As time passed after the completion of the APA, difficulties arose between Gelerman and Jeffrey Royer. Royer was the Chairman of the Board of Baylin. He was also the sole director and officer of the appellant, 2385796, Baylin's largest shareholder.

[20] On March 23, 2019, as part of its obligation to assist Gelerman to continue as a director in accordance with the APA, as noted above, Baylin's Lead Director and Chair of its Corporate Governance and Compensation Committee, wrote to Gelerman on behalf of that committee. The letter notified Gelerman that pursuant to the APA, he would be nominated for election at the 2019 Annual General Meeting (scheduled for May 14, 2019). However, the letter further notified Gelerman that 2385796 did not intend to vote in favour of his re-election and, without that support, it was not expected that Gelerman would be re-elected. The letter further suggested that Gelerman "may choose to contact 2385796 Ontario Inc. (via Jeff Royer) to discuss that shareholder's concerns with your continuing as a director for the ensuing year". Gelerman says that he never received the letter that was sent by email. As a consequence, he did not respond to the letter.

[21] Gelerman did not make any effort to contact Royer, or any other director, to discuss the election or ask for any assistance. Royer's evidence was that, given that lack of communication, he decided that 2385796 would not vote in favour of Gelerman's re-election as a director of Baylin.

[22] At the Annual General Meeting, Gelerman only received approximately 29 per cent of the eligible votes for his re-election. 2385796, and other shareholders, withheld their votes relative to Gelerman's election. Gelerman did not submit his resignation as required by Baylin's majority voting policy. Consequently, Baylin's Board never considered whether it would accept the resignation.

[23] Instead, the two applications I mentioned at the outset were commenced.

(5) The claim for set-off

[24] An additional issue arises. Pursuant to s. 8.1 of the APA, Spacebridge agreed to indemnify Baylin and its affiliates from all damages arising from any incorrect representation in the APA. Indemnity claims seeking damages in the millions of dollars have been made by Baylin against Spacebridge. Under s. 8.8 of the APA, Baylin may set-off any indemnification amount to which it may be entitled under the APA against "amounts otherwise payable" by Baylin to Spacebridge.

[25] On May 8, 2019, Baylin wrote to Spacebridge and gave notice pursuant to s. 8.8 of the APA of its intention to exercise the right of set-off for certain indemnity claims against any amounts payable under the Consulting Agreement. Those indemnity claims are the subject of separate proceedings between the parties.

C. The Decision Below

[26] The application judge found that Baylin's majority voting policy did not comply with the TSX majority voting requirement. He also found that the policy had been introduced for reasons other than compliance with the TSX requirement. The application judge found that the Baylin majority voting policy did not comply with the TSX majority voting policy in three respects. He said, at para. 39:

The Policy is not, however, the Majority Voting Requirement required by the TSX or even "substantially" the Majority Voting Requirement required by the TSX. It differs in three material respects: 1) The TSX Requirement refers to the majority of votes cast at the meeting whereas the Policy is not based on votes cast but rather on "withheld votes"; 2) the TSX Requirement does not limit what may constitute "Exceptional Circumstances" which the board must find to not accept the resignation and allow the director to continue whereas the Policy restricts the Board's determination of Exceptional Circumstances to consideration of three circumstances only; and 3) as will be seen, in restricting the Exceptional Circumstances to the three enumerated circumstances, the Policy excludes the TSX's specific example of exceptional circumstances concerning "commercial agreements regarding the composition of the Board".

[27] The application judge then considered the oppression remedy under s. 248 of the OBCA. He found that the evidence established that, among other things, both Spacebridge and Gelerman had an expectation arising from the background leading up to the APA, and the terms of the APA itself, that Gelerman would be a director of Baylin for the two-year period. The application judge also found that they had a reasonable expectation that Baylin would act honestly and in good faith in assisting Gelerman to be elected to the Baylin Board for the two years in issue.

[28] The application judge went on to find that Baylin's actions in presenting the majority voting policy to the Board at the March 13, 2019 meeting, on the basis that the Policy was required by the TSX, was not accurate. Indeed, he found [at para. 54] that it was "misleading and false". The application judge also found it to be a breach of Gelerman's reasonable expectations as a director and that it was oppressive, unfairly prejudicial to, and disregarded Gelerman's role as a director. The application judge also found [at para. 54] that the majority voting policy "was very clearly not the TSX's Majority Voting Requirement".

[29] The application judge went further and concluded that he was satisfied that the reason the majority voting policy was drafted in the manner it was, was to enable the removal of Gelerman as a director of Baylin.

[30] As a consequence of his conclusions, the application judge set aside the majority voting policy.

[31] On the issue of set-off, the application judge found that the indemnification clause in s. 8.8 of the APA applied to any "amounts otherwise payable" by Baylin to the Spacebridge Group arising from the transaction, including amounts payable under the Consulting Agreement.

[32] However, the application judge also found that, in respect of the share portion of the consulting fee under the Consulting Agreement, once the shares were delivered to Davies Ward Philips & Vineberg ("DWPV") in trust, that portion of the fee was paid by Baylin. Since the shares "had been paid", in the view of the application judge, they were not amounts otherwise payable and, thus, were not amounts subject to set-off.

D. Analysis

(1) Mootness

[33] Before turning to the issues raised, I must address the submission of Gelerman that this matter is moot because he remained a director of Baylin for the time he claimed he was entitled to while these proceedings were underway.

[34] I do not accept that the issues raised in this case are now moot because of that passage of time. The application judge did not simply determine that Gelerman was entitled to remain as a director of Baylin. He also held that Baylin's majority voting policy was flawed, and he set it aside. That latter determination remains binding on Baylin. Unless reversed, Baylin will have to design a new majority voting policy, because the rules of the TSX require it to have such a policy. Baylin's rights are therefore still affected by the decision: Mental Health Centre Penetanguishene v. Ontario, [2010] O.J. No. 1044, 2010 ONCA 197, 260 O.A.C. 125, at para. 35.

[35] In addition, there is a recognized exception to the strict application of the mootness principle in cases which raise an issue of public importance regarding which a resolution is in the public interest: Borowski v. Canada (Attorney General), [1989] 1 S.C.R. 342, [1989] S.C.J. No. 14, at p. 361 S.C.R. The submissions of the intervenors in this case satisfy me that there are matters of public importance involved in this case and that their resolution will be in the public interest as they will assist corporate governance of public companies in Ontario generally.

(2) The Majority Voting Policy

[36] The parties are agreed on one point and that is that the application judge erred in his conclusion regarding the effect of votes withheld in the election of a director under a majority voting policy. The application judge held that votes withheld are not votes cast and therefore do not count in the election results. In reaching this conclusion, the application judge misunderstood the TSX policy. The TSX policy is clear that votes withheld are votes against a director. To conclude otherwise would mean that any director who received even a single vote in favour would have achieved more than 50 per cent +1 of the votes cast. Indeed, in the single favourable vote scenario, the director would have received 100 per cent of the votes cast, if the application judge's interpretation were to be accepted.

[37] The approach taken by the TSX, of considering withheld votes as votes against for the purposes of a majority voting policy, was necessary to avoid the effects of the plurality voting requirements that are currently contained in statutes, such as the OBCA, that govern the election of directors. Under plurality voting, shareholders must either vote for a director or they must withhold their vote. A withheld vote has no effect under the statute. It is as if the vote was not cast. Consequently, under the prevailing statute, a director is elected if only one vote is cast for that director, regardless of the number of withheld votes.

[38] The purpose behind adopting a majority voting policy for publicly traded companies was to provide "a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors". In order to accomplish that purpose, the majority voting policy was designed to consider votes withheld as votes against a director. If that then resulted in the director receiving less than 50 per cent +1 of the votes cast, the policy required that director, although technically elected under the statute, to tender his/her resignation. The Board of Directors was then required to accept that resignation, absent exceptional circumstances.

[39] The application judge's misunderstanding of this central aspect of the TSX majority voting policy infected his approach to, and view of, the Baylin majority voting policy. That error led to another. The application judge went on to conclude that the Baylin voting majority policy also did not comply with the TSX policy because the Baylin policy stipulated only three situations that would constitute exceptional circumstances.

[40] Again, the application judge misunderstood the requirements of the TSX majority voting policy. The TSX policy provides that, in a situation where a director is required to tender his resignation, that resignation must be accepted by the Board of Directors, absent exceptional circumstances. The TSX policy does not stipulate what will, or will not, constitute exceptional circumstances. Rather, the TSX policy left the determination of exceptional circumstances to be dealt with on a case-by-case basis. Indeed, it is the practice of the TSX to review any corporation's invocation of exceptional circumstances as justifying its refusal to accept a director's resignation.

[41] However, in order to assist its members in applying the TSX majority voting policy, the TSX provided some examples of circumstances that might constitute exceptional circumstances, and thus justify the refusal by a Board of Directors to accept a director's resignation. The 2017 TSX Staff Notice said, on this subject:

Examples of exceptional circumstances may include:

• the issuer would not be compliant with corporate or securities law requirements, applicable regulations or commercial agreements regarding the composition of the Board as a result of accepting the Subject Director's resignation;
• the Subject Director is a key member of an established, active Special Committee which has a defined term or mandate (such as a strategic review) and accepting the resignation of such Subject Director would jeopardize the achievement of the Special Committee's mandate; or
• majority voting was used for a purpose inconsistent with the policy objectives of the Majority Voting Requirement.

[42] Two things are clear from this Notice. One is that there is no requirement for a majority voting policy to delineate what will, or will not, constitute exceptional circumstances. The other is that the TSX was providing "examples" of circumstances that "may" constitute exceptional circumstances. Whether those circumstances, or any others, would in fact constitute exceptional circumstances was to be determined on the particular facts of any given case.

[43] All of that said, there is nothing in the TSX policy that precludes a corporation from stipulating, in advance, what it will consider as exceptional circumstances. Indeed, the intervenor, the Canadian Coalition for Good Governance, submits that the narrower the exceptional circumstances exception is made in any given policy, the more it promotes the purpose of such policies, which is to hold directors accountable to shareholders. Whether any stipulated exceptional circumstance would be accepted by the TSX will, of course, have to await a review at the time that the exceptional circumstance is invoked. However, advanced warning of what a corporation would accept as exceptional circumstances will benefit individual directors in knowing where they stand in terms of compliance with the policy.

[44] The application judge erred in finding that Baylin's adoption of specified exceptional circumstances in some fashion constituted a violation of, or unacceptable departure from, the TSX majority voting policy. In fact, Baylin's adoption of those specified exceptional circumstances advanced the purpose that underlies majority voting policies. It also, as I have said, gave fair notice to directors as to what Baylin would consider exceptional circumstances should the issue arise.

[45] The application judge also found that the Baylin majority voting policy did not meet the requirements of the TSX majority voting policy because the Baylin policy did not contain the exception regarding "commercial agreements regarding the composition of the Board". This critique of the Baylin policy suffers from the same error that I just set out regarding the application judge's approach to the exceptional circumstances category generally. Baylin was not required by the TSX voting majority policy to include commercial agreements as an exceptional circumstance.

[46] It follows from all of the above that the application judge erred in concluding that the Baylin majority voting policy did not comply with the TSX policy on majority voting. The opposite conclusion, that the Baylin policy was compliant, is the only one that can be properly drawn from the record.

(3) Oppression

[47] The application judge moved from his conclusions regarding the Baylin majority voting policy to the issue of oppression. He concluded that both Gelerman and Spacebridge had a reasonable expectation that Gelerman would be a director for the two-year period of the earn-out. He then concluded that Baylin's actions in adopting the majority voting policy were "misleading and false" and that the policy was drafted for the purpose of removing Gelerman as a director.

[48] The application judge's finding regarding the reasonable expectations of Gelerman and Spacebridge are findings of fact that are entitled to deference from this court. They may only be interfered with if a palpable and overriding error is demonstrated.

[49] In my view, Baylin has demonstrated such an error. I begin with the fact that reasonable expectations are to be viewed on an objective, not subjective, basis. As the Supreme Court of Canada said in BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, at para. 62:

As denoted by "reasonable", the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be "just and equitable" to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.

[50] I do not quarrel with the finding that Gelerman might himself have believed that he would remain a director for the two-year period. However, that expectation was not objectively reasonable, at least not by the time of the 2019 Annual General Meeting. I say that for two main reasons.

[51] First, Gelerman knew that Royer had control over 2385796, which was the majority shareholder of Baylin at the time that he entered into the APA. Gelerman did not have any undertaking from Royer, or from 2385796, to support him as a director. As observed in BCE Inc., at para. 78, one of the factors to be considered in determining whether an expectation is objectively reasonable is "whether the claimant could have taken steps to protect itself against the prejudice it claims to have suffered". Gelerman could have negotiated for a commitment from Baylin, and its majority shareholder, as part of the APA, that he would be a director for the two-year period, but he did not. In fact, such a commitment was requested during the negotiation of the APA but was expressly rejected. All that Gelerman obtained, as part of the APA, was an undertaking by Baylin that it would nominate Gelerman for election to its shareholders and would honestly and in good faith assist Gelerman to obtain the votes necessary for election. I would add that the APA was negotiated between the parties, all of whom were represented by experienced lawyers. As a general proposition, it will be difficult for a party to advance that it had a reasonable expectation regarding a particular result that is above and beyond that for which the party negotiated: Casurina Limited Partnership v. Rio Algom Ltd., [2004] O.J. No. 177, 181 O.A.C. 19, at para. 26.

[52] With respect to the latter promise of good faith, Royer had obligations in his position as an officer of the majority shareholder that were separate and apart from his obligations as Chairman of Baylin. Indeed, it would have been improper for Royer to act in a manner contrary to the interests of the majority shareholder in order to further the interests of Baylin. Gelerman knew, or should have known, that Royer was obliged to act as he thought best in exercising his duties as the sole officer and director of the majority shareholder.

[53] Second, Gelerman had been warned by Baylin that he did not have the support of Royer for election at the 2019 Annual General Meeting. He was urged to seek out Royer and have a discussion with him about the problems between them before the vote was held. Gelerman made no effort to do so. While Gelerman maintains that he did not receive the letter which contained this warning, it is difficult to foist any blame onto Baylin for that failure. I would add that it is somewhat telling, on this point, that there was a follow-up letter sent by Baylin on this issue that Gelerman also did not respond to.

[54] In any event, it is hard to believe that, even without this warning, Gelerman would have been unaware of Royer's attitude towards him, and the problem that it posed for his position as a director, given what had transpired at different Board meetings prior to the 2019 Annual General Meeting, much of which is set out in Gelerman's own affidavit. I note that the application judge found [at para. 57] as a fact that Royer "had a general dislike for Gelerman's approach to being a director". The potential impact of that fact, in terms of him continuing as a director, could not have been lost on Gelerman.

[55] The application judge moved from his findings about reasonable expectations to his conclusion that Baylin acted oppressively against Spacebridge and Gelerman. However, his oppression conclusion appears to be based entirely on the adoption of the majority voting policy. The errors that the application judge made respecting the majority voting policy, as I have detailed above, clearly drove his conclusion regarding what he saw as oppressive conduct.

[56] On the subject of oppressive conduct, and the majority voting policy, the application judge made certain additional findings that are problematic. One is that the application judge drew an adverse inference against Baylin because it did not reveal the legal advice that it had received regarding the presentation and passage of the majority voting policy. The legal advice that Baylin received was clearly privileged, as the application judge acknowledged. It is difficult to rationalize that fact with the criticism that the application judge leveled against Baylin, on more than one occasion in his reasons, for its failure to reveal legal advice that it was entitled to keep privileged. There is also no evidence that Gelerman ever asked what legal advice had been received, at the time that the matter came before the Board of Directors. Indeed, there is no evidence that Gelerman asked any questions about the background to the policy at the Board meeting, when he voted in favour of the majority voting policy.

[57] The application judge also concluded that the majority voting policy was passed for the purpose of removing Gelerman as a director. However, the basis for this conclusion is the application judge's erroneous understanding of the background to, and need for, the majority voting policy. While the application judge acknowledged that Baylin was "required" to implement a majority voting policy, he does not appear to have given any weight to that fact in his analysis. Rather, in his oppression analysis, the application judge repeated his error about votes withheld not being votes against. He also relied on the absence of the commercial agreement exception as an exceptional circumstance which repeated his misunderstanding of the policy requirements respecting exceptional circumstances.

[58] Finally, the application judge found [at para. 58] that the Baylin majority voting policy was "contrary to the [purpose] of the TSX's Majority Voting Requirement". In fact, the Baylin majority voting policy complied with the TSX requirement. The application judge's conclusion [at para. 59] that the Baylin policy "is oppressive and unfairly prejudicial and unfairly disregards both Gelerman's and Spacebridge's reasonable expectations" arises from his misunderstanding of the policy. It is a conclusion that is fundamentally flawed and cannot stand. It also led to a palpable and overriding error respecting his finding of oppression.

(4) Set-off

[59] As explained above, the set-off issue arises from a combination of the APA and the Consulting Agreement. Baylin has asserted claims for indemnity against Spacebridge in the millions of dollars. Those claims are being contested in separate proceedings. At the same time, Baylin was obliged to pay Gelerman, and his wife, $2.5 million over two years pursuant to the Consulting Agreement. Baylin claims the right to set-off its indemnity claims against the amounts that had not as yet been paid, under the Consulting Agreement, when it gave notice of its indemnity claims. It did so on May 8, 2019. More specifically, Baylin claims the right to set-off its claims against the five share certificates that had been delivered to DWPV, but which had not, as of that time, been released to Gelerman and his wife.

[60] As noted above, $1.25 million of the consulting fees were to be paid by way of eight share certificates that were delivered to DWPV and to be released by them in quarterly installments. The dates of the installments were March, June, September and December in each of 2018 and 2019. The share certificates for March, June and September 2018 were released. The share certificates for December 2018 and March 2019 were not released, apparently because DWPV required the consent of Baylin to do so and that consent was not forthcoming, the reason for which is not entirely clear. Once Baylin gave notice of its set-off claim in May 2019, none of the June, September and December 2019 share certificates were released.

[61] On this issue, the application judge found, at para. 67, that:

Based on the above wording and having regard to the wording of para. 8.8 together with the entire APA and the other agreements forming part of the purchaser and sale transaction, I am satisfied that the right to set-off is not limited to amounts payable under the APA but rather encompasses any "amounts otherwise payable" by Baylin to the Spacebridge Group arising from the transaction. That would include amounts payable under the Consulting Agreement.

[62] I agree with the application judge's conclusion on this point. The words "amounts otherwise payable" are clearly broad enough to capture payments due under the Consulting Agreement.

[63] However, the application judge went on to conclude that delivery of the share certificates to DWPV constituted payment by Baylin of the amounts due under the Consulting Agreement and, thus, those amounts were no longer "amounts otherwise payable" to which the indemnity claim could attach.

[64] I do not agree with the application judge's conclusion in this regard. The amounts due under the Consulting Agreement were not paid by Baylin simply by delivering the share certificates to DWPV. The whole structure of the Consulting Agreement was that the amounts due under it were to be paid out over a two-year period. The share certificates were delivered at the outset, but were not to be released by DWPV until the quarterly dates arrived, as I have explained above. Consistent with the structure and intent of the Consulting Agreement, the amounts payable under it were not paid until the share certificates were released. That has not happened with respect to the five share certificates held by DWPV. The amounts represented by those share certificates have not been paid as a consequence and, thus, those amounts remain payable.

[65] The difficulty that is then presented is whether Baylin's claim for amounts under the indemnity agreement can be set-off against the claim by Gelerman for delivery of the share certificates under the Consulting Agreement. Unfortunately, there does not appear to be any relevant case law that deals with the issue of whether share certificates can be the subject of a set-off claim in circumstances similar to those presented in this appeal.

[66] I begin by noting that in Holt v. Telford, [1987] 2 S.C.R. 193, [1987] S.C.J. No. 53, Wilson J. confirmed, at p. 204 S.C.R., that legal set-off requires mutual debts. Similarly, Wilson J. held, at p. 206 S.C.R., that equitable set-off is only available in respect of "money sums". These observations have been noted with approval in the few cases that actually deal with non-monetary claims, including Dresser Industries Inc. v. Vos, [1985] A.J. No. 863, 60 A.R. 226 (Master), a case cited in argument by the respondent.

[67] If Baylin was asserting legal or equitable set-off, it does not appear that such a right could be maintained since the concepts of "debt" and "money sums" do not appear to be broad enough to include share certificates or the shares themselves. While shares represent intangible property with value, as Kevin McGuinness concludes in Canadian Business Corporations Law, 3rd ed. (Toronto: LexisNexis, 2017), at §18.388, shares of a corporation do not themselves constitute debt obligations owed to the shareholder. The relationship between the corporation and the shareholder is not one of debtor/ creditor. He also concludes, at §18.42, that shares are not a "sum of money". I am prepared to accept, for the purposes of this appeal, that those conclusions are correct.

[68] However, Baylin does not assert legal or equitable set-off. Rather, it asserts a contractual right of set-off arising from s. 8.8 of the APA. Contractual rights of set-off are not limited by the requirements of debts and money sums. On this point, Kelly Palmer, in The Law of Set-Off in Canada (Aurora: Canada Law Book, 1993), at p. 263, notes that the normal rules of set-off such as mutuality, liquid debts and connected debts do not apply and that the parties are free to contract for whatever result they wish. He concludes that "agreements to set-off which would, aside from the agreement, not be granted relief due to the absence of the requirements of set-off, will be upheld".

[69] This view, that the technical requirements of legal and equitable set-off do not apply to contractual set-off, finds support in certain comments of the Supreme Court of Canada in Caisse populaire Desjardins de l'Est de Drummond v. Canada, [2009] 2 S.C.R. 94, [2009] S.C.J. No. 29, 2009 SCC 29. Although the primary issue in that case was whether the agreement between the parties constituted a security interest for purposes of s. 224(1.3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), Rothstein J., at para. 22, commented on contractual compensation or set-off, stating:

Contractual compensation achieves a similar goal to legal compensation or legal or equitable set-off, the discharge of mutual debts. However, contractual compensation achieves this goal through mutual consent. It provides the contracting parties with a self-help remedy that avoids the technical requirements of legal compensation or legal or equitable set-off: see J.-L. Baudouin and P.-G. Jobin, Les obligations (5th ed. 1998), at para. 981, and K. R. Palmer, The Law of Set-Off in Canada (1993), at pp. 263-64. Both a contract providing for a right of compensation in Quebec and a contract providing for a right of set-off in the common law provinces are to be interpreted by a court in a manner that gives effect to the intentions of the parties as reflected in the words of the contract.

(Emphasis added)

[70] I see no reason in principle why the "money sum" rule should be treated any differently from other technical legal or equitable set-off requirements such as mutuality, liquid debts and connected debts, none of which apparently apply in the contractual set-off context. Accordingly, in my view, the parties to a contract are free to contract for the set-off of money's worth or property. Put simply, a contract can override legal and equitable set-off principles.

[71] The question then is whether s. 8.8 of the APA accomplishes that result. I believe that it does. The principles of contractual interpretation are well-known. They were recently summarized by the Supreme Court of Canada in Resolute FP Canada Inc. v. Ontario (Attorney General), [2019] S.C.J. No. 60, 2019 SCC 60, 444 D.L.R. (4th) 77, at para. 74:

This Court has described the object of contractual interpretation as being to ascertain the objective intentions of the parties (Sattva, at para. 55). It has also described the object of contractual interpretation as discerning the parties' "reasonable expectations with respect to the meaning of a contractual provision" (Ledcor, at para. 65). In meeting these objects, the Court has signalled a shift away from an approach to contractual interpretation that is "dominated by technical rules of construction" to one that is instead rooted in "practical[ities and] common-sense" (ibid.). This requires courts to read a contract "as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract" (ibid.).

[72] Section 3.1 of the Consulting Agreement clearly indicates that the Baylin common shares form part of the consideration for the consulting services. The Baylin common shares are ascribed a value that comprises part of the total annual compensation. They represent, in the ordinary sense of the words, amounts that are payable under the Consulting Agreement. That conclusion is consistent with the conclusion reached by the application judge (with which I agree) regarding the meaning of the words "amounts otherwise payable" under s. 8.8 of the APA.

[73] Considering the ordinary meaning of the words of the agreements in context, the common-sense interpretation of the provisions requires the release of each individual share certificate on a particular date to represent an actual payment to the respondent in consideration of the services that have been performed. That means that Baylin should have been permitted to set-off the share certificates that had not been released, representing amounts not yet paid but "due", following Baylin's notice of its indemnification claims at the time of the application.

E. Conclusion

[74] The appeal is allowed, the orders below are set aside, and in their place, orders are granted:

(a) declaring that Baylin's majority voting policy is in accordance with the TSX's majority voting requirement and that Baylin's majority voting policy remains in force;

(b) declaring that Gelerman was required to have submitted his resignation to the Baylin board for consideration following the 2019 Annual General Meeting;

(c) that the remaining share certificates shall not be released from trust, pending the determination of Baylin's indemnity claims against Spacebridge, the consent of the parties, or further order of the Superior Court of Justice.

[75] The appellants are entitled to their costs of the appeal fixed in the agreed amount of $25,000 inclusive of disbursements and HST. If the parties cannot agree on the disposition of the costs below, they may make written submissions on that issue. The appellants shall file their written submissions within ten days of the release of these reasons and the respondents shall file their submissions within ten days thereafter. Each side's submissions shall be limited to five pages (excluding bills of costs) and no reply submissions shall be filed.

Appeal allowed.

Notes

1 While the issue was not raised before us, I note that appeals from orders made under the Business Corporations Act, R.S.O. 1990, c. B.16 lie to the Divisional Court: s. 255. However, since relief beyond the parameters of the Business Corporations Act was sought and determined in the orders below, this court has jurisdiction to hear the appeal: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 6(2).

2 Ontario Securities Commission, "TSX Request for Comment, Amendments to Part IV of the TSX Company Manual" in OSC Bulletin, 34:36 (September 9, 2011), 34 OSCB 9500, p. 9502.

3 See, for example, s. 27 of the General regulation under the OBCA, R.R.O. 1990, Reg. 62, which states: "A form of proxy shall provide a means for the shareholder to specify that the shares registered in the shareholder's name shall be voted or withheld from voting in respect of the appointment of an auditor, the remuneration of the auditor or the election of directors."

4 Ontario Securities Commission, "TSX Request for Comment, Amendments to Part IV of the TSX Company Manual" in OSC Bulletin, 34:36 (September 9, 2011), 34 OSCB 9500, p. 9502.

End of Document