Goodwood Inc. v. Cathay Forest Products Corp.

Ontario Reports
Ontario Superior Court of Justice,
D.M. Brown J.

June 20, 2013

116 O.R. (3d) 150 | 2013 ONSC 4242

Case Summary

Corporations — Shareholders — Meetings — Shareholder applying successfully under s. 144(1) of Canada Business Corporations Act for order directing holding of shareholders' meeting — Court's power under s. 144 to order shareholders' meeting including power to require company to reimburse applicant for expenses reasonably incurred in respect of requisitioning, calling and holding meeting — Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 144.

The applicant shareholder applied successfully for an order under s. 144(1) of the Canada Business Corporations Act ("CBCA"). The meeting was held and a new board of directors was elected, consisting of the applicant's proposed slate of directors. The applicant then brought a motion for an order requiring the company to reimburse it for the costs which it incurred.

Held, the motion should be granted in part.

In the circumstances of this case, resort to s. 144 was necessary. There was no reason why the applicant should not be able to recover from the corporation costs similar to those it would have been entitled to recover had it been practicable for it to call the meeting under s. 143(4) of the CBCA. The court's power under s. 144(1) of the CBCA to "order a meeting of the corporation to be called, held and conducted in the manner that the court directs" includes the power to require the company to reimburse the applicant shareholder for the expenses reasonably incurred in respect of "requisitioning, calling and holding the meeting". Not all of the costs which the applicant sought to recover fell into that category.

Cases referred to

Allied Cellular Systems Ltd. v. Bullock, [1990] B.C.J. No. 1698 (C.A.), affg 1990 860 (BC SC), [1990] B.C.J. No. 1437, 49 B.L.R. 306, 21 A.C.W.S. (3d) 1146 (S.C.); Goodwood Inc. v. Cathay Forest Products Corp., [2012] O.J. No. 2734, 2012 ONSC 3548 (S.C.J.); Goodwood Inc. v. Cathay Forest Products Corp., [2013] O.J. No. 2062, 2013 ONSC 2696 (S.C.J.)

Statutes referred to

Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 143 [as am.], (1), (4), (6), 144 [as am.], (1) [as am.]

Company Act, R.S.B.C. 1979, c. 59 [rep.]

Courts of Justice Act, R.S.O. 1990, c. C.43 [as am.] [page151]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 57

Authorities referred to

Nathan, Hartley R., Mihkel E. Voore and Kathleen Skerret, Corporate Meetings Law and Practice (Toronto: Carswell, 1995)

Peterson, Dennis, and Matthew J. Cumming, Shareholder Remedies in Canada, 2nd ed. (Markham, Ont.: LexisNexis, 2009)

MOTION for an order requiring a company to reimburse a shareholder for costs relating to a court-ordered shareholders' meeting.

P. Steep and H. Burnett, for applicant.

D.M. BROWN J.: —

I. Motion to Recover Costs Relating to a CBCA S. 144 Court-Ordered Shareholders' Meeting

[1] By reasons dated June 17, 2012 ([2012] O.J. No. 2734, 2012 ONSC 3548 (S.C.J.)), I granted an order under s. 144(1) of the Canada Business Corporations Act (the "CBCA") directing the holding of a meeting of the shareholders of the respondent, Cathay Forest Products Corp. That meeting was held and a new board of directors was elected, consisting of the applicant's proposed slate of directors. The applicant seeks an order requiring Cathay to reimburse it the following costs which it incurred:

(i) $4,534.09, representing the costs of printing the notice of meeting and dissident's proxy circular;

(ii) $7,732.33, representing the fees of the court-appointed independent chair of the shareholders' meeting;

(iii) $469,180.85, representing a $400,000 flat fee, plus the disbursements, of its shareholder advisory consultant, VC & Co. Incorporated. Those disbursements included amounts paid to Broadridge Investor Communication Solutions for the required distribution of the notice of meeting and the fees of Equity Financial Trust Company, the court-appointed proxy depository and scrutineer for the meeting; and

(iv) $177,452.39, representing the fees and disbursements of its counsel, McCarthy Tetrault LLP. [page152]

[2] At the return of the matter on May 1, 2013, no person appeared to oppose the request, but I advised applicant's counsel that I required further evidence to support the fee arrangement with VC&Co., as well as a more detailed bill of costs explaining counsel's fees, especially in light of the quantum sought. I issued further directions by order made May 7, 2013 ([2013] O.J. No. 2062, 2013 ONSC 2696 (S.C.J.)). The applicant filed the requested materials.

II. Background to this Request for Costs

[3] Following my June 17, 2012 order directing the holding of a special meeting of Cathay's shareholders on July 30, 2012, the meeting was held, with Mr. Jonathan Levin serving as the independent chair of the meeting and Equity Financial Trust Company acting as the proxy depository and meeting scrutineer. Prior to that meeting, the applicant, through its advisor, VC& Co., and its counsel, McCarthys, prepared and distributed a dissident's information circular. Also, just prior to the meeting the three incumbent directors resigned, leaving Cathay without any directors.

[4] At the meeting, Cathay's shareholders voted overwhelmingly (86.31 per cent of the votes cast, or approximately 58 per cent of the issued and outstanding shares) to elect the four new directors supported by the applicant.

[5] The dissident proxy circular had included a section on the proposed treatment of the costs incurred to secure and hold the special meeting:

The costs incurred in the preparation and mailing of this Circular and the solicitation of proxies hereunder will be borne in first instance by VC&Co. VC&Co. expects to seek reimbursement from Cathay for such costs and for expenses, including legal fees, incurred up to the date of the Meeting in connection with the Reconstitution Plan including in connection with the Court Application. As well, the Reconstitution Plan provides that if the Board is successfully reconstituted, VC&Co. will be paid a fee of $400,000, with such fee being paid or reimbursed by Cathay. The Supporting Shareholders have confirmed that they support these arrangements, and each Supporting Shareholder who has signed a Support Agreement has agreed therein to support the payment by Cathay of such amounts in accordance with the Reconstitution Plan and to take such actions as may be reasonably requested by VC&Co. to cause Cathay to make such payments.

As disclosed in the dissident proxy circular, the supporting shareholders held 38.5 per cent of Cathay's outstanding shares. [page153]

[6] The evidence filed on this request for costs came from VC&Co., the applicant's shareholder advisory firm. That evidence contended that following the reconstitution of Cathay's board of directors,

(i) the board considered that the costs incurred by the applicant were "reasonable" and "benefited Cathay and all its shareholders";

(ii) the board received legal advice regarding the scope of insurance coverage potentially available to Cathay in respect of those costs; and

(iii) the board determined that it was in the best interests of Cathay to defer paying or reimbursing the applicant for the account of McCarthys and VC&Co. until the applicant's request for costs had been determined by the court.

That evidence was given on an information and belief basis. The record did not contain any resolution passed by Cathay's directors or shareholders approving or opposing the payment of the costs sought by the applicant.

III. The Statutory Provision

[7] Section 143 of the CBCA, dealing with the requisition of meetings by shareholders, provides that if a corporation's directors do not within 21 days after receiving the requisition call a shareholders' meeting, then any shareholder who signed the requisition may call the meeting. Section 143(6) then deals with the issue of the reimbursement of the costs of the requisitioning shareholders:

143(6) Unless the shareholders otherwise resolve at a meeting called under subsection (4), the corporation shall reimburse the shareholders the expenses reasonably incurred by them in requisitioning, calling and holding the meeting.

[8] Section 144 of the CBCA authorizes a court to order a meeting of a corporation to be called and held upon the application of a shareholder, but the section does not contain a provision addressing the issue of the reimbursement of the costs of the applicant shareholder.

[9] Applicant's counsel was unable to find any cases which contained a substantive discussion of the issue of the reimbursement of costs in a situation where a shareholder has resorted to s. 144 of the CBCA. Counsel did point me to a decision of the British Columbia Supreme Court, Allied Cellular Systems Ltd. v. Bullock, which granted the appointment of an independent meeting chair under similar provisions of the British Columbia Company Act, R.S.B.C. 1979, c. 59. That court ordered the costs of the appointment of the independent meeting chair to be borne by the corporation.

[10] The authors of Corporate Meetings Law and Practice have written that, "[w]hile there is no specific provision for costs, it can be assumed that the court has a broad statutory jurisdiction to award costs". So, too, the authors of Shareholders Remedies in Canada, Second Edition, have written:

There are no specific provisions for awarding costs for court-appointed meetings. In general, the court has broad jurisdiction to determine and award costs under the CBCA model.

[11] In my June 17, 2012 reasons, I made strong findings of fact against Cathay's incumbent board of directors, including findings that the directors of Cathay were in breach of their duties to call an annual meeting of shareholders and had failed to take steps to call the meeting of shareholders requisitioned under s. 143(1) of the CBCA. Under the circumstances then existing, as described in my June 17, 2012 reasons, it would have been impracticable for the requisitioning shareholders to have called and conducted a meeting. Resort to CBCA s. 144 was necessary in those circumstances. I granted the applicant's request to order a special meeting of shareholders. The incumbent directors took no steps to facilitate that meeting. It was left to the applicant, with the assistance of its shareholder advisor, to bring about the court-ordered meeting. The applicant and the other supporting shareholders, in their dissident proxy circular, had disclosed their intention to seek recovery of their costs from Cathay and disclosed the amount of the VC&Co. fee. Shortly before the meeting, the incumbent directors resigned. The meeting was held, and the shareholders overwhelmingly elected directors proposed by the applicant and the other supporting shareholders.

[12] Under those specific circumstances, I see no reason why the applicant should not be able to recover from the corporation costs similar to those it would have been entitled to recover had it been practicable for the applicant to call the meeting under CBCA s. 143(4), which in the circumstances it was not. In my view, the court's power under CBCA s. 144(1) to "order a meeting of a corporation to be called, held and conducted in the manner that the court directs" includes the power to require the company to reimburse the applicant shareholder for "the expenses reasonably incurred" in respect of "requisitioning, calling and holding the meeting", including securing the court order calling the meeting.

IV. Analysis: The Costs for Which Reimbursement is Sought

A. Costs of printing the notice of meeting and dissident proxy circular and the court-appointed independent chair of the shareholders' meeting

[13] The applicant seeks reimbursement from Cathay of $4,534.09, representing the costs of printing the notice of meeting and dissident proxy circular, as well as $7,732.33, representing the fees of the court-appointed independent chair of the shareholders' meeting. The latter costs clearly fall within the category of costs of "holding the meeting" and are recoverable. The former properly relate to "calling the meeting" because I had ordered the applicant to take such steps. Cathay shall pay the applicant costs of $12,266.42 in respect of those two items.

B. Fees of the shareholder advisory firm

[14] The applicant and other supporting shareholders retained VC&Co., a shareholder advisory firm. They negotiated a fixed fee with VC&Co. for its services — $400,000, plus disbursements, contingent upon the successful reconstitution of Cathay's board. The services performed by VC&Co. were provided, in large part, by one of its principals, Michael Woollcombe, and a vice-president, Shane Priemer. During the course of their mandate, they did not keep dockets, which is understandable given the fixed fee nature of their retainer. VC&Co. did file an affidavit which described the work performed by the company from April through to the end of July 2012, as well as estimates of the hours spent by each gentleman during each month. I found that information quite helpful.

[15] From the descriptions of work performed provided in that affidavit, VC&Co. did the following work:

(i) providing the applicant and a few other shareholders with advice as to whether it made any practical sense to seek the reconstitution of Cathay's board;

(ii) creating an overall plan to reconstitute Cathay's board;

(iii) securing support for that strategy from a large number of shareholders (ultimately the supporting shareholders who held 38.5 per cent of Cathay's shares);

(iv) making demands of the Cathay board to call a shareholders' meeting and provide shareholder information;

(v) making the formal requisition of a shareholders' meeting;

(vi) providing affidavit evidence to McCarthys in support of the court application and discussing the litigation strategy with McCarthys;

(vii) retaining the firms who would deal with the mechanics of calling the meeting, including the printing of materials;

(viii) retaining the independent chair of the meeting and discussing the meeting with him, including providing a chair's script for the meeting, at the request of the independent chair;

(ix) organizing the retainer of Duff & Phelps Canada Restructuring Inc., which was appointed the temporary receiver and manager of Cathay's affairs, as I had ordered;

(x) coordinating the mechanics of holding the meeting;

(xi) consulting with Duff & Phelps about ongoing issues concerning the business of Cathay;

(xii) discussing with the prospective directors the "initial actions to be taken by the new board"; and

(xiii) arranging for new directors and officers liability insurance.

[16] Grouping this work into a smaller set of categories, one can see that most of the work performed by VC&Co. fell into five key areas:

first area of work: the actual requisitioning, calling and holding of the meeting: items (iv), (v), (vii), (viii) and (x);

second area of work: providing evidence for the applicant shareholder in support of the order calling the meeting and consulting with counsel during that process: item (vi);

third area of work: discussions with the court-appointed temporary receiver and manager about the affairs of Cathay: items (ix) and (xi);

fourth area of work: Providing strategic advice to the applicant and other shareholders before the requisition was made: items (i), (ii) and (iii);

fifth area of work: Providing strategic advice to the applicant's proposed slate of directors before the meeting was held, but about matters which would arise after the meeting took place: items (xii) and (xiii).

[17] In this day and age, shareholder advisory firms frequently provide services to dissident or activist shareholders in public companies. Some of that work benefits the interests of the specific shareholders who retain such advisory firms, and such shareholders are free to negotiate whatever retainer they think reasonable with a shareholder advisory firm. In a broader sense, if the dissident shareholders are able to effect a change in the management of the public company, sometimes benefits will accrue to all shareholders if enhanced financial performance of the company results. But, notwithstanding the potential for such broader benefits, I do not think CBCA s. 143(6) or, by implication in the present case, CBCA s. 144 are aimed at enabling dissident or activist shareholders to secure recovery from the corporation of all costs they incurred to bring about the desired governance change in the company. The ambit of allowable recovery under the statute is much narrower: the costs of "requisitioning, calling and holding the meeting". Such work obviously benefits all shareholders of the company because it creates the occasion at which they may vote on fundamental governance issues, including the election of directors. I do not read the statute, however, as offering a successful activist shareholder reimbursement of all the costs it incurred in effecting the desired governance change. Some of those costs must be borne by the shareholder itself, at least as the statute presently reads.

[18] Accordingly, I think the work performed by VC&Co. in the first area of work is recoverable as relating to the "requisitioning, calling and holding the meeting". I do not see the second area of work as recoverable — generally a party is not entitled to recover its own costs of giving evidence as a witness in a proceeding or its own costs of talking with its lawyer, even in cases where full indemnity costs are awarded. In respect of the legal process, the applicant is entitled to reimbursement of its reasonable legal fees, but not for its own work or the work of its surrogate, in this case VC& Co.

[19] The work falling into the fourth and fifth areas of work involved matters broader than the "requisitioning, calling and holding the meeting" and are not recoverable under the statute. As to the work which pre-dated the making of the requisition, had Cathay's directors responded to the requisition and called a meeting, the applicant would not be entitled to recover any of its costs up to that point of time under CBCA s. 143(6). I think the clock begins to run on recoverable costs at the point of making the requisition, in the event the directors do not respond and the shareholder must then arrange for the meeting. So, too, the work relating to post-meeting matters, even if done before the meeting, is not recoverable.

[20] Finally, as to the third area of work, Duff & Phelps acted as the interim receiver and manager and that firm passed its accounts, which I approved on May 1, 2013. Just as a creditor could not seek a court order for the recovery of the time it spent in discussing the affairs of a company with a court-appointed receiver, so too VC&Co., as the surrogate of some shareholders, is not entitled to recover from the company its costs of discussing Cathay's affairs with Duff & Phelps.

[21] Counsel for the applicant submitted that in the current era of public companies practical necessity dictated the ability of a dissident shareholder to recover its broad costs of seeking governance change, otherwise shareholders would be reluctant to embark upon such a course of conduct. I am skeptical about that argument. Many reasons exist for shareholders to seek governance change, and the transactional costs of securing the reconstitution of a board of directors may pale in the face of forecast improvements to corporate performance following such change, including the enhancement of the stock price. In any event, if the CBCA is to enable the recovery of such a broad range of expenses, then it is up to Parliament to make that policy change.

[22] Where does that leave matters, then, in light of the fixed fee arrangement between the applicant and VC&Co.? Although an officer of VC&Co. filed an affidavit deposing that Cathy's new board considered the claimed costs "to have been reasonable and to have benefited Cathay and all its shareholders", no such evidence was filed by an officer or director of Cathay, the company from whom reimbursement is sought. Indeed, Cathay simply did not show up on this motion, nor did it file any direct evidence. I therefore have no direct evidentiary guidance from Cathay as to what its board thinks is reasonable by way of reimbursement.

[23] Nor has any evidence been filed describing the prevailing range of fees charged by shareholder advisory firms in the Toronto market for similar work which could act as a benchmark against which to measure the reasonableness of the $400,000 fee negotiated between VC&Co. and the applicant shareholder. The only "comparable", so to speak, is the account of McCarthys, the applicant's legal counsel, which for the period May 31, 2012 until October 3, 2012 amounted to approximately $103,000 in fees based on docketed time. From my review of McCarthys' dockets, most of that time involved work undertaken between the date of the requisition and the holding of the meeting, so round it off to $100,000 in fees, or so.

[24] In the absence of a formal breakdown of VC&Co.'s time by task, any allocation of its fee to what I have termed the recoverable first area of work will be somewhat on the "rough and ready" side of approximations. Clearly, VC&Co. performed work relating to the "requisitioning, calling and holding of the meeting" which was not performed by legal counsel. Based upon my review of the evidence filed by VC&Co. about what work it did and when, together with my review of the dockets describing the work performed by McCarthys, I conclude that a fair allowance of "the expenses reasonably incurred" by the applicant in respect of the work performed by VC&Co. in respect of "requisitioning, calling and holding the meeting" would be $100,000, inclusive of HST. I allow the disbursements billed by VC&Co. of $17,180.85 ($14,724.32, plus HST, plus $542.37); they consisted of necessary expenses to call and hold the meeting. I therefore order Cathay to reimburse the applicant $117,180.85 in respect of the work performed and expenses incurred by VC& Co.

C. Legal fees

[25] Based upon my review of the McCarthys dockets, the fees billed, on a straight time basis at actual rates, for the work performed in respect of the calling and holding the meeting, including the application to court to secure the meeting, amounted to $100,000 (plus $13,000 in HST), together with disbursements of $2,274.14 (including HST), or a total of $115,274.14. In light of my findings in the June 17, 2012 reasons about the failures of the then directors of Cathay to comply with their obligations to hold an annual shareholders meeting and to respond to the requisition for a meeting, the applicant is entitled to recover its legal costs at full rates, or what would be termed "elevated costs" if the matter was approached under the Courts of Justice Act costs regime. I am satisfied that the work performed by applicant's legal counsel was reasonable in the circumstances.

[26] However, the applicant does not seek reimbursement from Cathay just of the "straight time" billed by McCarthys. The retainer negotiated with McCarthys contained elements of risk and reward: if the applicant did not succeed in reconstituting the board of directors, McCarthys would receive no compensation; if it was successful, McCarthys would receive an additional payment equal to 50 per cent of its docketed time. That led McCarthys to render an account in the amount of $177,452.39, all in.

[27] While an applicant dissident shareholder is free to enter into a contingency/premium retainer agreement with its counsel, in my view the level of reimbursement available for "expenses reasonably incurred" in respect of legal fees under the CBCA cannot exceed actual docketed time and incurred disbursements. Traditional principles of cost indemnification are based on actual time and disbursements. A departure from those traditional principles should come about as a result of statutory change, not judicial fiat. Consequently, I order Cathay to reimburse the applicant its reasonably incurred legal costs for the requisitioning, calling and holding of the meeting in the amount of $115,274.14.

V. Conclusion

[28] By way of summary, I order Cathay to reimburse the applicant its reasonably incurred expenses of requisitioning, calling and holding the July 30, 2012 shareholders meeting in the amount of $244,721.41, consisting of (i) $4,534.09, representing the costs of printing the notice of meeting and dissident's proxy circular; (ii) $7,732.33, representing the fees of the court-appointed independent chair of the shareholders' meeting; (iii) $100,000 for shareholders advisory fees, plus disbursements of $17,180.85; and (iv) $115,274.14 in legal costs.

Motion granted in part.

Notes

1 R.S.C. 1985, c. C-44, as amended.

2 Calculated using 138,086,814 issued and outstanding shares as set out in footnote 1 on p. 12 of the dissident's proxy circular.

3 1990 860 (BC SC), [1990] B.C.J. No. 1437, 49 B.L.R. 306 (S.C.), affd [1990] B.C.J. No. 1698 (C.A.).

4 Hartley R. Nathan, Q.C., Mihkel Voore and Kathleen Skerret, Corporate Meetings Law and Practice (Toronto: Carswell, 1995), updated, p.14‑16.1.

5 Dennis Peterson and Matthew Cumming, Shareholder Remedies in Canada, 2nd ed. (Markham, Ont.: LexisNexis, 2009), updated 5.33.

6 I would note that in para. 74 of my June 17, 2012 reasons, I did call for the parties to submit written cost submissions. None were submitted at that time. In its recent cost submissions, the applicant relied on both the CBCA and the Courts of Justice Act, R.S.O. 1990, c. C.43/Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Although the applicant's claim for the costs of its counsel could be considered under the Rules, in my view the other expenses claimed would not qualify as disbursements under Rule 57. Accordingly, the CBCA provides the appropriate framework to consider the claim for all costs.

7 That is, billed fees of $155,025 1.5, reflecting the 50 per cent premium added to docketed time in accordance with the retainer agreement.

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