SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Goodwood Inc., Applicant

AND:

Cathay Forest Products Corp., Respondent

BEFORE: D. M. Brown J.

COUNSEL:
P. Steep and E. Marques, for the Applicant
J. Groia, for the Stephen Miller, a director of the respondent
J. Teskey, for Norton Rose Canada LLP
N. Baker, for the representative plaintiff in the Mac Killoran class action

HEARD: June 15, 2012

REASONS FOR DECISION

I. Application for a court-ordered shareholder meeting and related orders

[ 1 ] Goodwood Inc. is a shareholder of Cathay Forest Products Corp. The Board of Cathay no longer has a quorum of directors. Goodwood seeks three types of orders from the court: (i) an order directing the holding of shareholder meeting; (ii) orders requiring Cathay to comply with certain corporate governance and reporting provisions of the Canada Business Corporations Act ; and, (iii) an order restraining Cathay and its directors, officers, employees and agents from transacting certain types of business without court approval prior to the constitution of a new board of directors.

[ 2 ] Cathay did not appear on the return of the application. One of its directors, Mr. Stephen Miller, was represented by his personal counsel.

[ 3 ] For the reasons set out below, I grant the application.

II. Evidence of Cathay’s non-compliance with corporate and securities obligations

A. The company

[ 4 ] Cathay is a CBCA corporation with its registered and head office located in Richmond Hill, Ontario. Through subsidiaries Cathay has commercial forest products, primarily in the People’s Republic of China and Russia.

[ 5 ] Cathay is a reporting issuer in Ontario and certain other Canadian provinces. When its shares were listed on the TSX Venture Exchange, at their peak the company had a market capitalization of over $150 million.

B. The OSC cease-trade orders and stock de-listing

[ 6 ] In February, 2011, the TSX Venture Exchange suspended the trading in Cathay’s shares and subsequently de-listed them.

[ 7 ] Since May, 2011 Cathay’s common shares have been the subject of cease trade orders by the Ontario Securities Commission. Those orders resulted from Cathay’s failure to comply with continuous disclosure requirements, including failing to file audited financial statements for its year-ended December 31, 2010 and failing to file management’s discussion and analysis in respect of those financial statements.

C. The directors

The number of directors and the requirements for quorum

[ 8 ] Cathay’s articles were not filed before me. According to section 4 of the Company’s By-Law No. 1:

The board of directors shall consist of the number of directors set out in the articles of the Company or, if the number of directors has since been changed the number of directors in office at the date hereof or, where a minimum and a maximum number is provided for in the articles, such number of directors as shall be determined from time to time by resolution of the directors or shareholders.

[ 9 ] Cathay’s last annual general meeting was held in June, 2010. The Management Information Circular for that meeting stated that the Board of Directors “currently consists of 7 directors”. Six directors were elected at the June 24, 2010 annual meeting. Four days later, on June 28, 2010, the Board appointed a seventh director.

[ 10 ] As of late January, 2012, Cathy’s Board had been reduced to 5 directors as a result of resignations; two vacancies existed. On May 11, 2012, two directors resigned, leaving only three directors, Man Hung Chan, Hong Tat Honda Cheng and Stephen H. Miller.

[ 11 ] Mr. Miller filed an affidavit on this application. He did not dispute that Cathay’s Board should consist of seven directors and that at present only three board members hold office. On the evidence before me I find that at the present time only three of the seven positions on Cathay’s Board of Directors are filled.

[ 12 ] Section 10 of Cathay’s By-Law No. 1 provides that “a majority of the directors shall form a quorum for the transaction of business and, notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of directors.” Section 6 of the By-Law provides, in part, that “where a vacancy occurs and a quorum of directors remains in office, whether or not a majority thereof are resident Canadians, a quorum of directors may appoint a qualified person to hold office for the unexpired term of his predecessor.” When section 10 is read in light of section 6, I conclude that for a board of seven directors, the By-Law stipulates a quorum of 4 directors. Accordingly, I find that at the present time a quorum of directors on Cathay’s board does not exist.

Residency of directors

[ 13 ] Section 4 of By-Law No. 1 provides that: “A majority of the directors shall be resident Canadians and, if the Company is a distributing corporation, at least two of the directors shall not be officers or employees of the Company or of any affiliate of the Company.” Section 10 stipulates that “no business shall be transacted at a meeting of directors unless a quorum of the board is present and a majority of directors present are resident Canadians.”

[ 14 ] None of the current three directors of Cathay are resident Canadians: Messrs. Chan and Cheng reside in Hong Kong, PRC, and Mr. Miller resides in either Hong Kong or Florida.

[ 15 ] Accordingly, I find that the board of Cathay as presently constituted does not meet the Canadian residency requirements stipulated by the Company’s by-laws.

[ 16 ] Section 105(3) of the CBCA requires, subject to certain exceptions, that at least 25% of the directors of a corporation must be resident Canadians. Section 114(3) states that “directors…shall not transact business at a meeting of directors unless, (a) if the corporation is subject to subsection 105(3), at least twenty-five per cent of the directors present are resident Canadians or, if the corporation has less than four directors, at least one of the directors present is a resident in Canada”. Consequently, I find that the board of Cathay, as presently constituted without any resident Canadian directors, cannot transact business at its meetings.

D. Officers

[ 17 ] Since August, 2011, Cathay has not had a chief executive officer. The termination of its chief financial officer was announced on June 1, 2012.

E. Continuous disclosure obligations

[ 18 ] Cathay has failed to file any financial statements or MD&A in relation to any period after September 30, 2010. It is in default of its continuous disclosure obligations prescribed by sections 77 and 78 of the Ontario Securities Act .

F. Annual shareholders meeting

[ 19 ] Cathay last held an annual meeting of shareholders on June 24, 2010. Under section 133(1) of the CBCA the directors of Cathay were required to hold an annual general meeting of shareholders no later than June 30, 2011. They failed to do so.

G. Summary on the issue of non-compliance

[ 20 ] By way of summary, I find that at present: (i) Cathay is in default of its obligation to make the continuous financial disclosure required by the OSA ; (ii) the directors have failed to call the annual general meeting required by the CBCA ; (iii) the Board of Directors lacks a quorum; and (iv) the Board of Directors lacks the number of resident Canadian directors required by the Company’s by-laws.

(Decision text continues exactly as in the source.)