SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Roland Larsen, Applicant
- v. -
Royal Standard Minerals Inc., Respondent
BEFORE: Mr. Justice H.J. Wilton-Siegel
COUNSEL: Peter L. Roy and Sean M. Grayson, for the Applicant
L. David Roebuck and Samuel M. Robinson, for the Respondent
HEARD: January 10, 2012
ENDORSEMENT
1The applicant, Roland Larsen, (the “applicant”) seeks a declaration that the management information circular of Royal Standard Minerals Inc. (the “Company”) respecting an annual general meeting of shareholders scheduled for today, January 11, 2012, was not authorized pursuant to s. 115 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”). He also seeks an order pursuant to ss. 154 and 247 of the CBCA that the annual general meeting be adjourned for 20 days and that the board of directors of the Company send a notice to all shareholders correcting certain alleged untrue statements of material facts in the management information circular.
Factual Background
2The applicant’s employment as the president and chief executive officer of the Company was terminated by the board of directors on December 6, 2011, at which time he was offered continued employment as the “chief exploration officer”. The board meeting on that day was adjourned to December 12, 2011 to consider a revised management information circular. The board of directors approved the management information circular “in principle” on December 12, 2011 based on the draft at the meeting and delegated the authority to finalize the circular to a special committee of two directors. The circular was finalized on December 13, 2011 and mailed on December 15, 2011. The applicant had not responded to the Company’s offer of continued employment by that date. He did not attend the board meeting on December 6, 2011 or the re-convened meeting on December 12, 2006.
3The applicant is currently a director of the Company but was not proposed for re-election in the management slate of directors included in the management information circular sent to the shareholders. He has two objections to the disclosure in the circular: (1) the statement that he stepped down as the president and chief executive officer, which he says should instead state that he was terminated without cause; and (2) the omission of any statement that he is owed $1 million as a result of his termination without cause.
Alleged Invalid Authorization of the Management Information Circular
4I agree with the applicant that the management information circular was not properly authorized by the board of directors on December 12, 2011. While it is permissible to leave the finalization of a management information circular to a committee of directors notwithstanding s. 115 of the CBCA, such action must pertain only to immaterial matters. Otherwise, it constitutes delegation of the authority of the board to approve the management information circular, which contravenes s.115. In the present circumstances, the committee approved the substitution of a new proposed nominee as director for a nominee who was approved by the board at its meeting but subsequently withdrew. This action clearly contravenes the prohibition in s. 115 of the CBCA against delegation of approval of a management information circular to a committee of directors.
5However, at a meeting held on January 9, 2012, the board of directors ratified the management information circular, including the substitution of this new proposed nominee. I am satisfied that, in the circumstances, this constitutes approval of the circular in accordance with the provisions of the CBCA.
6In principle, a management information circular would be presumed to be valid unless and until a court were to find otherwise pursuant to a proceeding under s. 247 of the CBCA. I do not agree with the applicant that a board of directors cannot, under any circumstance, retroactively ratify a management information circular.
7While a court might be persuaded that retroactive ratification subsequent to mailing of a circular was ineffective in circumstances where prejudice could be demonstrated, that is not the case in this proceeding. The mere fact that shareholders have presumed the circular to be valid and have deposited proxies in reliance on the statements in the circular is not sufficient to demonstrate prejudice flowing from the defective authorization of the circular prior to its mailing (as opposed to the statements in the circular that are alleged to constitute misrepresentations, which are addressed below). I also do not accept the applicant’s suggestion that, in order to conceal their decision from the other directors, the committee of directors acted in bad faith by approving the new proposed nominee rather than convening a new board meeting. This is not reasonable given that the circular was to be distributed to the shareholders two days later.
8Accordingly, I conclude that the management information circular was validly authorized by the board of directors, on a retroactive basis, on January 9, 2012.
Relief Sought in Respect of the Alleged Misrepresentations in the Circular
9The applicant relies on ss. 154 and 247 of the CBCA for the remaining relief sought on this motion based on the alleged misrepresentations described above. There are two separate issues to be addressed in turn: (1) whether the statements constitute misrepresentations; and (2) if so, whether the statements and/or omission are material.
Do the Statements Constitute Misrepresentations?
10As mentioned, the applicant submits that there are two misrepresentations in the management information circular: (1) the statement that he stepped down as the president and chief executive officer, which he says should instead state that he was terminated without cause; and (2) the omission of any statement that he is owed $1 million as a result of his termination without cause.
11In considering this issue, it is important to note that the management information circular speaks as of the date of its mailing to shareholders. The regime respecting proxy circulars in the CBCA, and in provincial securities legislation, does not contemplate any requirement to update a proxy circular for developments subsequent to the date of the circular.
The Statement Regarding the Termination of the Applicant’s Employment
12In this case, the management information circular speaks to the state of affairs on December 13, 2011. As of that date, the applicant had not responded to the Company regarding its proposal that he accept the position of “chief exploration officer”. He had not, and as of the date of this motion, still has not commenced any proceedings to enforce his rights under his employment agreement, which contemplates arbitration in Virginia to address any claims in respect of the agreement.
13However, there was no doubt that the Company had terminated his employment and there was no reasonable basis for the Company to believe that he would accept the position offered to him. The offer of employment involved a release of his current rights in return for a one-year contract in a lesser role in the Company. The board was not intending to propose him for re-election. There had been a lengthy standoff at the time of his termination involving a security guard before he relinquished his computer at the demand of the Company, which sought to ensure that its confidential information was protected. The covering letter of the interim president and chief executive officer to the shareholders of the Company, which accompanied the management information circular, was critical of the applicant on several issues.
14In these circumstances, I consider the statement that he “stepped down” as president and chief executive officer to be incorrect. The words “stepped down” in common parlance denote an action on the applicant’s part, even if it was taken unwillingly as a result of some compulsion exerted by third parties. It implies a resignation, not a termination. While the critical language in the interim president and chief executive officer’s covering letter to the shareholders would have suggested the possibility that the applicant’s employment had been involuntarily terminated, the language in the circular is inconsistent with that message. At best, the language in these documents, considered as a collectivity, is equivocal in the sense of leaving the question raised but unanswered.
The Statement Regarding the Applicant’s Potential Contractual Claim for Termination Without Cause
15The second issue is one of an alleged omission of any reference to the applicant’s contractual claim for pay in lieu of notice of $1 million under his employment agreement. As an allegation of an omission, this issue is addressed below solely on the question of materiality. However, the following background considerations are relevant.
16The Company says that, as of December 13, 2011, it did not know whether the applicant would accept the employment offer made to him, in which event the claim would not continue. For the reasons set out above, I do not think this is reasonable. It also says that the claim would not arise under the employment agreement until he returned all Company property and information required under the agreement. This relates only to the timing of the Company’s payment obligation, not its existence. On the other hand, the actions of the Company, including in particular its investigation of the applicant’s activities as president and chief executive officer indicate an intention to oppose his claim to the extent that the Company is able to identify a defence, presumably of cause. However, the Company had not completed its consideration of its position in respect of the applicant’s claim as of December 13, 2011.
17Accordingly, as of that date, the Company was not required to acknowledge its liability for the applicant’s claim. It could, however, have made more complete disclosure to the effect that the applicant had a potential contractual claim for $1 million for termination without cause and that the Company was reviewing the extent to which such payment was owing under the terms of his employment agreement. I have analyzed the materiality issue on this basis.
Are the Alleged Misrepresentations Material?
18The issue for the court is, therefore, whether the two statements are material. The applicant says that the alleged misrepresentations are “relevant to the business to be discussed at the upcoming shareholders meeting because they directly relate to the issue upon which the shareholders are going to vote” at the meeting. At the hearing, it was acknowledged that the only issue to which the alleged misrepresentations are relevant is the election of the directors.
19Accordingly, the specific issues for the court are whether: (1) the fact that the applicant was terminated by the board of directors rather than resigned voluntarily is material to a shareholder voting for the management slate of directors at the forthcoming annual general meeting of shareholders; and (2) the fact that the applicant may have a claim under his employment agreement in the amount of $1 million for termination without cause is material for such purposes.
Applicable Law
20Both parties acknowledge that the test of a material fact has been set out by Rothstein J. in Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23, [2011] 2 S.C.R. 175, at para. 61, which followed the well-established definition of a material fact set out in TSC Industries Inc. v. Northway, Inc., 426 U.S. 438 (1976), rev’g 512 F.2d 324 (1975). The principle articulated by Rothstein J. is that an omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision. The following statements of Rothstein J. at para. 61 of that decision are relevant to this question:
In sum, the important aspects of the test for materiality are:
i. Materiality is a question of mixed law and fact, determined objectively, from the perspective of a reasonable investor;
ii. An omitted fact is material if there is a substantial likelihood that it would have been considered important by a reasonable investor in making his or her decision, rather than if the fact merely might have been considered important. In other words, an omitted fact is material if there is a substantial likelihood that its disclosure would have been viewed by the reasonable investor as having significantly altered the total mix of information made available;
iii. The proof required is not that the material fact would have changed the decision, but that there was a substantial likelihood it would have assumed actual significance in a reasonable investor's deliberations;
iv. Materiality involves the application of a legal standard to particular facts. It is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors; and
v. The materiality of a fact, statement or omission must be proven through evidence by the party alleging materiality, except in those cases where common sense inferences are sufficient. A court must first look at the disclosed information and the omitted information. A court may also consider contextual evidence which helps to explain, interpret, or place the omitted information in a broader factual setting, provided it is viewed in the context of the disclosed information. As well, evidence of concurrent or subsequent conduct or events that would shed light on potential or actual behaviour of persons in the same or similar situations is relevant to the materiality assessment. However, the predominant focus must be on a contextual consideration of what information was disclosed, and what facts or information were omitted.
21The onus of proving materiality rests on the applicant. Determination of the materiality of an omission is a fact-specific inquiry, to be determined on a case-by-case basis in light of all of the relevant considerations and from the surrounding circumstances forming the total mix of information made available to investors. Sharbern makes it clear that the materiality of a statement or omission must be proven through evidence, except in those cases in which common sense inferences are sufficient.
Analysis and Conclusions
22The applicant has failed to satisfy the onus of demonstrating the materiality of either of the statements raised by the applicant.
The Statement Regarding the Termination of the Applicant’s Employment
23The first statement relates to the manner of the applicant’s departure from the Company. To be clear, the Company did disclose that the applicant ceased to be the president and chief executive officer on December 6, 2011. The issue of materiality relates only to the failure to disclose that he was terminated rather than resigned.
24It is easy to assert, as the applicant does, that this fact might be considered relevant by a shareholder. However, the standard of materiality is demonstration of a substantial likelihood that the omitted fact would be considered important by a shareholder. The applicant has not provided any evidence from any of the shareholders or otherwise that there is a substantial likelihood that disclosure of the fact that the board of directors terminated the applicant’s employment would be considered by a reasonable shareholder to be important in making his or her decision regarding the management slate of directors.
25Instead, in effect, the applicant asks the court to infer materiality by way of a common sense inference. There are undoubtedly circumstances in which the court could draw this inference in the context of the termination of a chief executive officer who had been a founder of the company. However, it is not a necessary conclusion that operates in all circumstances.
26As noted above, determination of materiality is a fact-specific inquiry. By itself, the fact that the applicant was terminated rather than left voluntarily does not support an inference that this fact would be important to a shareholder’s decision regarding whether to vote for the proposed slate of directors, or to withhold the shareholder’s votes. I think that such a conclusion requires a more extensive factual matrix than is before the court in this case. On the evidence before the court, it is at least as probable that the shareholders do not consider the applicant’s continued involvement to be necessary or desirable for the success of the Company in the future and, therefore, would not regard the manner of his departure to be material to a decision regarding the proposed slate of directors. In any event, there is no evidence that the applicant’s departure is sufficiently detrimental that a reasonable shareholder would take the fact that he was terminated by the board into consideration by, presumably, withholding its votes for the election of the proposed directors or any particular members of that slate.
27The applicant also urges the court to make a determination of materiality based on the fact that the Company engaged a proxy solicitation firm to solicit proxies in respect of the matters to be voted upon at the annual general shareholders meeting, including the election of directors. He suggests that this action, together with the manner in which the board disclosed the applicant’s departure from the Company, indicates that the majority of the board of directors must have considered this matter to be material.
28I do not think that this is a reasonable basis for a determination of materiality. The Company has not held a shareholder meeting in 43 months. There are also a number of special business matters to be addressed at this meeting in addition to the election of directors. There is no specific evidence as to the reason for which the proxy solicitation firm was engaged. Therefore, on the evidence before the court, the link between the disclosure in the proxy circular and the engagement of the proxy solicitation firm is tenuous at best.
29Lastly, the applicant seeks to situate the materiality of the disclosure in the context of a disagreement between him and the majority of the directors regarding the prospective ability of the Company to meet its loan obligations and regarding the need for the Company to find an alternative source of financing. I do not think that he can do so by raising the disclosure regarding the involuntary nature of his departure. The record does not demonstrate any connection between these issues and the statements in the circular regarding the termination of the applicant’s employment. The new slate of directors is not committed to any particular course of action in the circular. They are free to adopt or reject his recommended option as they see fit. This issue has not been put to the shareholders in any manner in the proxy circular.
The Statement Regarding the Applicant’s Potential Contractual Claim for Termination Without Cause
30The second statement relates to the fact that the applicant may have a contractual claim of $1 million for termination without cause under his employment agreement, which is being considered by the Company. As mentioned, the Company made no reference to this claim in the management information circular. Although the circular contained a full description of his rights in the event of his termination without cause, as addressed above, it did not state that the had been terminated and, therefore, omitted to describe the status of this possible claim. The issue for the court is whether this fact is material for a shareholder in considering the proposed slate of directors.
31The applicant says it is material because the Company cannot afford his claim. The implication of the applicant’s argument is that, because of the terms of his contract, the directors could not and/or should not have fired him. That is a surprising position to take for reasons not directly at issue on this motion. However, for present purposes, it is also too strong a statement. For the reasons set out above, the court cannot conclude that the applicant’s claim is enforceable. As mentioned above, the only statements that could be made are that there is a potential liability to the applicant, which the applicant appears to acknowledge in the language of the form of order sought on this motion, and that this potential liability is being considered by the Company.
32Again, I can imagine how this might be a factor to be considered by a reasonable investor. However, the applicant has failed to demonstrate a substantial likelihood that this statement would be considered important in the present circumstances to a shareholder’s decision to vote for the management slate of directors or to withhold the shareholder’s votes.
33Any argument of this nature must be supported by evidence that demonstrates a substantial likelihood that a reasonable shareholder would consider the risk of payment of the applicant’s claim arising on the termination of the applicant’s employment to be important in deciding whether or not to vote for the proposed slate of directors. This is necessarily an exercise that is very fact specific ─ it must be rooted in the particular financial circumstances of the Company. The fact of triggering a possible claim could be material, if particular circumstances existed. However, it is not a necessary common sense inference. In many, if not most, circumstances of this nature, shareholders consider that a board of directors is best positioned to assess the trade-off inherent in such a decision.
34The applicant has failed to demonstrate any such circumstances in this case. As mentioned, his only argument is a suggestion that such disclosure would be relevant because of the Company’s financial status ─ specifically the “going-concern” notes in its financial statements. He suggests that payment of his claim will materially diminish the Company’s ability to meet its obligations to its lenders. However, the modest evidence before the court on this subject does not permit a conclusion that this is the case on a balance of probabilities. Moreover, to the extent the financial position of the Company is imperilled, it is at least as likely that the shareholders’ concerns would be focussed on larger issues and that the matter of the applicant’s claim for wrongful termination would not be material relative to these larger issues.
Conclusion
35For the foregoing reasons, the application is dismissed. I would note, however, that I have sympathy for the applicant’s position, given the Company’s decision to utilize a short mailing period and the intervening holiday season to make it difficult for the applicant to launch a proxy fight, if that is his intention. In addition, as set out above, for reasons that are unclear, the management information circular was not as forthright as it could have been about the termination of the applicant’s employment. In such circumstances, if there had been evidence beyond the applicant’s own assertion that the particular items of disclosure were material to shareholders, the court would have given serious consideration to exercising its discretion in the applicant’s favour. However, as disclosed above, the issues raised by the applicant are specific to the particular circumstances of the Company. The limited evidence before the court does not support any common sense inferences of materiality and there is no supporting evidence from other shareholders or otherwise that provides a basis to conclude that the corrected statements are material in the present circumstances.
36If the parties are unable to agree on the treatment of costs of this application, they will have thirty days from the date of release of this Endorsement to deliver costs submissions, not exceeding five pages in length, and a costs outline if they so choose.
Wilton-Siegel J.
Date: January 19, 2012