CITATION: Koh v. Ellipsiz Communications Ltd., 2016 ONSC 7345

COURT FILE NO.: CV-16-11562-00CL

DATE: 20161128

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Tat Lee (Michael) Koh, Applicant

AND:

Ellipsiz Communications Ltd., Respondent

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Geoff Moysa and Charlotte Conlin, for the Applicant

Jay Naster, for the Respondent

HEARD: November 24, 2016

ENDORSEMENT

[1] The applicant Tat Lee (Michael) Koh (the “applicant”) seeks a declaration that he has validly requisitioned a shareholders meeting pursuant to section 105(1) of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “Act”). He also seeks other ancillary or alternative relief.

Background

[2] The applicant is the largest shareholder of Ellipsiz Communications Ltd. (“ECL”), holding approximately 42% of the outstanding shares of the corporation.

[3] The principal asset of ECL is a wholly-owned Taiwanese operating subsidiary, Ellipsiz Communications Taiwan Ltd. (“ECTW”), which is held by ECL through an intermediate holding company, Hopeful Minds Group Limited (“HMGL”). ECTW operates an engineering services business that provides technical engineering services to major telecommunications companies in Taiwan.

[4] The president of ECTW is Chong Gin (Sam) Tan (“Tan”). Tan is also a director and the president of ECL and is the second largest shareholder of ECL holding approximately 26.6% of the outstanding shares. Prior to the reverse takeover referred to below, the applicant and Tan owned all of the outstanding shares of ECL.

[5] On November 4, 2015, ECL became a publicly traded corporation listed on the TSX Venture Exchange, following completion of a reverse takeover. On June 30, 2016, ECL’s first annual and general meeting of the shareholders as a public corporation was held (the “Meeting”). In connection with the Meeting, ECL’s board of directors (the “Board”) unanimously approved a management information circular dated May 18, 2016 (the “MIC”) which included a proposed slate of directors comprised of the applicant, Tan, Hans Chang, Elliott Jacobson, Grant Sawiak and Mark Korol. In this Endorsement, Messrs. Jacobson, Sawiak and Korol are referred to as the “Canadian Directors.”

[6] On or about June 29, 2016, the applicant changed his mind and attempted to withhold his votes in respect of the Canadian Directors at the Meeting. At the Meeting, the scrutineer ruled the applicant’s proxy to be non-compliant. The slate of directors proposed in the MIC was elected, including the Canadian Directors.

[7] Subsequently, meetings of the Board were held on July 5, 2016, July 29, 2016, and August 29, 2016. The board of directors of HMGL also held meetings on August 25, 2016 and August 31, 2016. The matters addressed at these meetings are discussed below to the extent they are relevant.

[8] On August 22, 2016, by a letter of that date of his legal counsel, the applicant demanded that the Canadian Directors resign, failing which he would requisition another shareholder meeting to remove them (the “Demand Letter”). The Demand Letter also contained a draft requisition. When the Canadian Directors failed to resign, the applicant formally submitted a requisition on August 30, 2016 seeking a shareholder meeting pursuant to section 105(1) of the Act (the “Requisition”). The Requisition proposed that a meeting be convened to consider two resolutions - a resolution to remove the Canadian Directors and, if approved, a further resolution to elect three new directors identified in the Requisition (the “Resolutions”).

[9] After a meeting on September 8, 2016, continued on September 19, 2016, the ECL Board advised the applicant by letter dated September 20, 2016 that it was declining the requisition (the “Rejection Letter”). The Board’s stated basis for its decision was that the Requisition was for the primary purpose of redressing a personal grievance against the corporation or its directors and, as such, it was exercising its authority under section 105(3)(c) of the Act. The position of the Board was supported by the Canadian Directors and Tan, with the applicant opposing and the remaining director being absent.

[10] In the Rejection Letter, the Board listed fifteen relevant factors that it says it considered in coming to its decision. Both parties effectively agree that they can be distilled into five main complaints that the Board contends are “personal grievances” of the applicant. The five main complaints are that the applicant:

(1) wanted to be the chairman of ECL and ECTW;

(2) wanted to be ECL’s negotiator in respect of a potential ECL acquisition of an unrelated company referred to as “M&M”;

(3) wanted to arrange financing for ECL, including but not limited to funding the M&M transaction if it proceeded;

(4) asked ECL’s investor relations firm to promote illegal trading of ECL’s shares; and

(5) insisted on reimbursement of expenses that he alleges were related to ECL.

[11] The applicant has purported to exercise his right under section 105(4) of the Act, taking the position that the Board is incorrect in characterizing the purpose of the Requisition as falling within the provisions of section 99(5)(b) of the Act. On this basis, he says that the Board lacks the jurisdiction to refrain from calling the meeting under section 105(3)(c). He has called a shareholders meeting for November 28, 2016.

Applicable Law

[12] The following sets out the applicable provisions of the Act and certain observations regarding the operation of these provisions.

Applicable Provisions of the Act

[13] This application turns on the operation of the following provisions of the Act:

99 (5) A corporation is not required to comply with subsections (2) and (3) where…

(b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders…

105 (1) The holders of not less than 5 per cent of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition. …

(3) Upon receiving the requisition referred to in subsection (1), the directors shall call a meeting of shareholders to transact the business stated in the requisition unless,

(a) a record date has been fixed under subsection 95 (2) and notice thereof has been given under subsection 95 (4);

(b) the directors have called a meeting of shareholders and have given notice thereof under section 96; or

(c) the business of the meeting as stated in the requisition includes matters described in clauses 99 (5) (b) to (d).

(4) Subject to subsection (3), if the directors do not within twenty-one days after receiving the requisition referred to in subsection (1) call a meeting, any shareholder who signed the requisition may call the meeting.

Principles Governing the Operation of Sections 99(5)(b) and 105(3)(c) of the Act

[14] Read together in the present context, sections 99(5)(b) and 105(3)(c) of the Act provide that the Board must call the requisitioned meeting unless it is “clearly apparent” that the business proposed by the applicant — being the Resolutions — is proposed for the primary purpose of redressing a personal grievance against the Canadian Directors.

[15] The Act therefore requires a determination of whether it is clearly apparent that the applicant’s primary purpose in proposing the Resolutions is to redress a personal grievance against the Canadian Directors. In other words, it is not enough to say simply that the purpose of the Meeting is to consider two resolutions regarding reconstitution of the Board, that the Board composition is a matter of the business and affairs of ECL, and that therefore the purpose falls outside section 99(5)(b). It is necessary to look beyond the language of the Resolutions to determine the “primary purpose” for which they are put forward.

[16] I agree with the applicant that, in making this determination, the Board is not making a business decision and, accordingly, the business judgment rule does not apply. The necessary standard both for the Board and for this Court is correctness.

[17] I also agree that the determination to be made for the purposes of section 99(5)(b) must be made on the basis of objective evidence in the form of the applicant’s actions. However, insofar as the applicant is suggesting, based on the statements of the application judge in Michaud v. Banque Nationale du Canada, 1997 CanLII 8814 (QC CS), [1997] R.J.Q. 547, at paras. 72-74, that the objective evidence should be limited to an examination of the Resolutions, I do not agree. Whether or not such an approach is correct regarding proposals which address a proposed corporate policy, as in Michaud, I do not think it is appropriate in the context of a requisition to reconstitute the board of directors of a public corporation in between annual and general meetings.

[18] As mentioned, the language of sections 99(5)(b) and 105(3)(c) of the Act, read together, requires a determination of the primary purpose of the applicant’s actions. This necessarily entails a determination of the applicant’s intent. However, the determination is to be made based on, and limited to, an examination of the objective evidence in the form of his actions, including any documentation prepared and delivered by him. Michaud makes it clear that it is not appropriate to address the applicant’s subjective intent by means of a cross-examination regarding his intentions in bringing the Requisition. On the other hand, as stated by Mongeon J. in National Bank of Canada v. Weir, 2006 QCCS 278, at para. 28, “…reference to prior conduct, behaviour or written communications of the shareholder does not automatically transform the applicable objective test into a subjective test.” [Emphasis in original.]

[19] Further, section 105(3)(c) of the Act requires the directors to make the determination in the first instance, so determination of the applicant’s primary purpose must be made against a standard of what a director would reasonably find based on the evidence before the directors. Similarly, read together, sections 99(5)(b) and 105(3)(c) impose the onus of proof of circumstances falling under section 99(5)(b) on the Board. Therefore, on this application, the onus of proof lies with ECL.

[20] Lastly, section 99(5)(b) imposes a high threshold of proof by virtue of the requirement that it must be clearly apparent that the primary purpose of the Requisition is to enforce a personal claim or redress a personal grievance. The Board’s authority to refuse to call the meeting requested in the Requisition depends on such a finding. This reflects, among other things, the fact that the right of dissident shareholders to requisition a meeting of shareholders is a “fundamental right” in respect of corporate governance afforded by the Act: see Paulson & Co. v. Algoma Steel Inc. (2006), 2006 CanLII 116 (ON SC), 79 O.R. (3d) 191 (Ont. S.C.), at paras. 40 and 41, per Cumming J.

Analysis and Conclusions

[21] I propose to address the issues on this application by first summarizing the positions of the parties and then identifying and addressing the issues on this application.

Positions of the Parties

[22] The applicant says that there is nothing on the face of the Requisition that supports the Board’s view that the primary purpose of his Requisition falls within section 99(5)(b) of the Act. He characterizes the purpose of the Requisition as being the reconstitution of the board of directors of ECL and submits that this purpose relates entirely to the business and affairs of ECL. The applicant says there is no evidence to support the Board’s determination that the Requisition was for the primary purpose of allowing the applicant to seek personal retribution or redress of a personal grievance against the Canadian Directors.

[23] The applicant frames the issue as whether the dispute between the applicant and the Canadian Directors relates exclusively to the management of ECL’s business and affairs or to some collateral dispute. He suggests that disputes about corporate policy, or the business and affairs of a corporation more generally, are not “personal grievances” even if these differences take on a personal tone. The applicant argues that the Canadian Directors are attempting to entrench themselves as directors in breach of their duties to the shareholders.

[24] ECL submits that, in the case of each of the matters in dispute between the applicant and the Canadian Directors, the issue is a personal matter. It says that, fundamentally, the applicant objected to what he perceived to be a lack of respect for him, particularly in his capacity as the largest shareholder of ECL. ECL also says that the evidence demonstrates that the Requisition was primarily directed to redressing this personal grievance against the Canadian Directors who the applicant believed had frustrated or impeded his personal agenda.

Issues on this Application

[25] The issues for the Court on this application are therefore twofold:

(1) What constitutes enforcing a personal claim or redressing a personal grievance against a corporation or directors of a corporation? and

(2) Whether ECL has clearly demonstrated that the applicant’s primary purpose in requisitioning the Meeting is enforcement of a personal claim or the redressing of a personal grievance.

I will address each issue in turn.

What Constitutes a Personal Claim or a Personal Grievance?

[26] The parties agree that there is no case law directly on this point. The applicant submits that a “personal claim” would involve litigation that is unconnected in any manner with the governance or operations of the corporation. He says that, similarly, a “personal grievance” would involve a dispute between a party and the corporation or its directors that lies outside the domain of corporate policy or the operations of the corporation.

[27] The applicant referred the Court to the decision of Dunphy J. in Saskatchewan WTF Taekwondo Assn. Inc. v. Taekwando Canada, 2015 ONSC 2937, 43 B.L.R. (5th) 134. In that case, the application judge ordered the calling of a meeting for the purpose of reinstating certain individuals as directors and removing others. The board of directors had rejected a requisition to the same end on the grounds that the primary purpose of the meeting was to enforce a personal claim or redress a personal grievance against the corporation and certain directors.

[28] The application judge held there was no clear basis for characterizing the motives of the requisitioning parties as being in the nature of a personal grievance. He stated that there were serious policy differences at issue, apparently based on differences between members of the “for profit” and “not-for-profit” sectors, not a personal vendetta. The application judge noted in this regard that the support for the application by a broad coalition of members belied any sense of a narrow-based personal grievance action. He concluded, at para. 20, that the differences between the parties were “profound policy and direction disagreements of the sort that the membership is best suited to assess and decide.”

[29] While this decision is not directly on point, it is helpful in establishing the standard by which a “personal grievance” is to be determined for present purposes. I consider that a personal grievance involves a dispute that does not entail an issue of corporate policy or operations but rather involves an issue primarily pertaining to the personal interest of the complainant.

[30] I further conclude that, in assessing whether any particular dispute does not involve a personal grievance, relevant considerations could include not only the nature of the dispute at issue but also: (1) the extent to which such dispute is properly the subject of a shareholders meeting or lies within the domain of directors; and (2) the extent to which the complainant acted alone or with the support of other like-minded individuals. I do not suggest, however, that these considerations are necessarily determinative in any given situation.

The Primary Purpose of the Requisitioned Meeting

[31] I turn then to the issue of whether ECL has established that it is clearly apparent that the applicant’s primary purpose in requisitioning the Meeting is to redress a personal grievance. Given the analysis above, it is necessary to make such a determination based on the evidence of the applicant’s actions before the Court. In this regard, I note that ECL has tendered affidavits of each of the Canadian Directors and Tan, which include correspondence from the applicant, minutes of meetings of the boards of ECL and HMGL, and other documentary evidence. The applicant has chosen, however, not to tender any evidence regarding his purpose in requisitioning the Meeting apart from the Demand Letter.

[32] In the Demand Letter, the applicant’s counsel states that he has lost trust and confidence in the Board as a result of its failure to respond to his numerous requests and urgings that the Board pursue “a more respectful and shareholder-centric approach” to certain matters. The matters to which the appellant refers have been set out above.

[33] The Letter then goes on to state the following:

Mr. Koh believes that his actions are necessary and, as you know, he has for some time raised the possibility of taking action to reconstitute the Board. Although Mr. Koh’s concerns are well understood by the Board, he has asked us to summarize some of his key concerns. He has repeatedly noted that several members of the Board have no respect for the desires and will of the shareholders and appear to believe that they are not stewards of the Company who must report to the owners of the Company. For months, the Board has operated in a dysfunctional manner, while some directors have been engaged in clandestine activity. Mr Koh is committed to ending such activity. In addition, certain members of the Board appear to be interfering in the operations of the business of the Company – and Mr. Koh believes that they are simply unqualified to assume such responsibilities. The conflicting roles of Mr. Sawiak – as a director, counsel to the Company and confidant of certain other directors – and the manner in which he undertakes his various duties simply exacerbates the problems. This conduct has created an environment in which the Board cannot function in a manner that serves the best interests of all shareholders. Ultimately, Mr. Koh believes the Board needs to be reconstituted in order to ensure that the Company is put on a path to enhancing shareholder value and is no longer distracted by the actions of directors who would cause the Company to stray from that path.

I note that there is no evidence before the Court that the Board had functioned in a dysfunctional manner nor that any directorshad engaged in clandestine activity. Nor is there any evidence of any complaints from any shareholders other than the applicant. I also note that the letter does not set out any specific issues of corporate policy in dispute between the applicant and the Canadian Directors.

[34] The following summarizes generally the evidence before the Court regarding the five matters at issue between the parties. It begins with the two matters identified by the applicant’s counsel as the strongest support for the applicant’s position that the dispute between the parties involves the business and affairs of ECL.

[35] First, the applicant believed that he should be the negotiator on behalf of ECL for a proposed transaction with a third party corporation referred to as “M&M”. All parties agree that the M&M transaction could be beneficial to ECL. However, the principal shareholder of M&M has repeatedly indicated that he does not wish to negotiate with the applicant. The applicant says he will vote against the transaction if that individual is not prepared to recognize his role as the major shareholder of ECL and negotiate with him. The applicant’s email of June 29, 2016, in which he expressed his perspective on this issue, is instructive:

Dear All

In my years of doing M&A, I had never and will never buy a compnay that refuse to meet the single largest shareholders [sic] of the acquiror. I do not need him to respect me, only respect the fact that I am the single largest shareholder plus the one to finance the deal.

I know Andrew personally. I can call him directly to indicate to him that if he is still interested in doing the merger he will need to discuss the deal with me. Singapore is a very small country, we have lots of common friends. If he did not want to deal with me. I can’t see myself buying a subsidiary that can’t work with me.

The applicant repeated this position at the meeting of the Board held on August 31, 2016.

[36] There is no issue of corporate policy or operations revealed by these circumstances. On the applicant’s own testimony, this issue involves a question of respect for him personally, in this case by the principal shareholder of the third party target, M&M. In asserting his demand to be the negotiator for ECL by virtue of the size of his shareholding, the applicant is confusing his roles as director and shareholder and pursuing an agenda that is properly that of a shareholder. As a director, he has a fiduciary duty to act in the best interests of the corporation. In the latter role, he is entitled to act in his self-interest and vote to reject a transaction after it is negotiated. Given the position of the principal shareholder of M&M, who is apparently concerned to ensure that the business be taken over by management with whom he is comfortable, the applicant’s fiduciary duty required that he approach the issue of the negotiator with a view to maximizing the prospects of a successful negotiation. In addition, the applicant based his demand that he be the negotiator for ECL on his intention to finance the acquisition. There is, however, no connection between these two roles that would require the applicant to act as ECL’s negotiator. There is also reason to doubt whether the proposed financings were credible. In any event, they are no longer on the table.

[37] Second, the applicant says that his opposition to the reconstitution of the board of directors of ECTW involved a difference of views respecting the corporate governance or operations of ECTW rather than a personal interest. The Canadian Directors say that the purpose of the reconstitution of the board of directors of ECTW was to put in place greater operational and financial controls over ECTW. As part of the reconstitution of the board, the applicant was removed as a director and ceased to be the chairman of ECTW, in which capacity the Canadian Directors believed he exercised too much independent authority over ECTW given the public company status of ECL.

[38] The applicant points to an excerpt of the minutes of the meeting of the board of directors of HMGL that was held on August 25, 2016. In a discussion regarding the proposed changes to the board of ECTW, the applicant is stated to have expressed the belief that the proposed changes would not be in the best interests of ECTW as it may cause management of the subsidiary to resign, which resignations he believed would impair the functioning and value of ECTW. The applicant says this discussion, and his position, indicates that this dispute involved a difference of opinion on an operational matter rather than a personal interest. ECL says, in effect, that the applicant’s words are not reflective of the reality, which is that he was alleging a concern for resignations as a cover for his personal agenda, being to remain as a director and as chairman of ECTW.

[39] In assessing this dispute, the following considerations are relevant. As mentioned, Tan was the co-owner with the applicant of ECTW for a number of years, as well as its chief executive officer in which role he continues today. Tan is also a director of ECTW but not of HMGL. Of all the parties, Tan has the best knowledge of both the applicant and ECTW. It is relevant that he has supported the reconstitution of the board of directors of ECTW and the removal of the applicant as chairman of that company. In addition, while hindsight can be discounted to a certain extent, it is also relevant that there have been no resignations, notwithstanding implementation of the board resolution.

[40] The foregoing evidence collectively supports the conclusion that the applicant’s alleged concerns were never credible. Accordingly, I conclude that the evidence regarding the applicant’s opposition to the reconstitution of the board of directors does not reveal any serious difference of opinion among the directors regarding the corporate governance or operations of ECTW. Instead, I find that the applicant was, in fact, principally concerned to maintain his position as a director and chairman of ECTW.

[41] I reach the same conclusion in respect of the remaining issues that have apparently resulted in the acrimony between the applicant and the Canadian Directors. The applicant is upset that he was not reappointed as chairman of ECL. In fact, he appears to have tried to use the offer of a “chairman’s guarantee” in respect of one or more financings proposed by him to maintain that role with ECL in the same manner as he tried to use the financings as a reason to be ECL’s negotiator in respect of the proposed M&M transaction. In the end, the financings have not materialized and he ceased to be the chairman as of July 5, 2016.

[42] The applicant is also upset that ECL has refused to reimburse him for certain pre-November 4, 2015 expenses that he says were incurred on behalf of ECL. The Canadian Directors have insisted that he provide supporting documentation for his expenses. In what may be a related matter, at the meeting of the Board on August 29, 2016, the applicant demanded repayment of a loan made to ECTW which was not due until March 31, 2017 and under which the Board says the applicant had failed to extend the full amount to which he had committed. These are not issues of corporate policy or of operational policy.

[43] Lastly, the applicant is also upset at the refusal of one of the Canadian Directors, in his capacity as the investor relations advisor to ECL, to accede to certain trading arrangements proposed by the applicant with a view to increasing the value of the share price of ECL. When he was advised that such activities are illegal, the applicant appears however to have retracted his proposals. This is therefore not a major consideration. The significance for present purposes is that the dispute does not reflect a dispute regarding corporate policy or operations.

[44] In addition to the foregoing, the testimony of Tan in his affidavit referred to above is also relevant in assessing the evidence, not only because of his longer experience with the applicant than any of the other parties, but also because the applicant has not sought to remove him from the Board. The last two paragraphs of Tan’s affidavit read as follows:

I am unaware of any reason respecting the business of ECL that would warrant the Applicant, on August 22, 2016, demanding the resignation of the Canadian directors. I am unaware of any reason respecting the business of ECL that would warrant the Applicant, on August 30, 2016, requisitioning another meeting of shareholders for the purpose of conducting a vote to remove the Canadian Directors.

I am of the view that the Applicant is seeking to remove the Canadian Directors not as a consequence of any business reason respecting the best interests of the Company and its shareholders, but because the Canadian Directors are impeding the Applicant’s ability to conduct the affairs of the Company in a manner consistent with his personal interests. Refusing to permit the Company from proceeding with an acquisition that would be of benefit to ECL because the applicant felt he was not being respected by [the principal shareholder of M&M] is entirely inconsistent with my understanding of the duties of a Board member. It is for this reason that I advised the Applicant on September 4, 2016 that if he is successful in his efforts to remove the Canadian Directors I had no interest in continuing to serve as a director (or officer) of the Company.

[45] Tan’s testimony, while the subject of cross-examination, was not contradicted in any material manner. It is clear that Tan also fails to see any dispute pertaining to the business and affairs of ECL that warrants the applicant’s actions and that Tan perceives the applicant’s actions as being directed toward furthering his personal interests.

[46] In addition, in assessing the issues in dispute between the parties, there are two other considerations which are suggestive of this result although not determinative. First, this is not a case in which there is a dispute between two groups of directors. The applicant is on his own. There are six directors of ECL. As mentioned, Tan supports the position of the Canadian Directors. The remaining director has not taken a position in this proceeding of which the Court is aware. Second, the matters at issue are properly dealt with at the board level rather than at the shareholder level. It is for this reason that the applicant seeks to reconstitute the Board. However, the nature of the matters in dispute does, to a certain extent, reinforce the conclusion that there are no significant issues of corporate policy or corporate operations at issue between the parties.

[47] In a larger sense, the acrimony between the applicant and the Canadian Directors reflects a conflict between the applicant’s sense of his entitlement as the largest shareholder of ECL and the Canadian Directors’ position that these matters are properly addressed by the Board and that, as a director, the applicant should act in the best interests of ECL. The important point is that the evidence described above regarding the five matters in dispute demonstrates that the applicant’s position reflected his own personal interests rather than any larger sense of the best interests of ECL. In other words, the dispute does not reflect a significant difference between the parties regarding corporate policy or corporate operations.

Conclusions

[48] Based on the foregoing, I conclude that it is clearly apparent that the applicant’s primary purpose in making the Requisition is to redress a personal grievance against ECL and the Canadian Directors. Accordingly, the applicant’s motion for a declaration that the proposed Meeting was validly called pursuant to section 105(4) of the Act, as well as the applicant’s further application for the costs of holding the Meeting, are therefore denied.

[49] In the alternative, the applicant also seeks an order calling a meeting of the shareholders of ECL pursuant to section 106(1) of the Act to take place on November 28, 2016. Given the determination above, I see no basis for such an order. On this issue, the onus rests with the applicant. He has failed to demonstrate any issue of such concern to the shareholders that it is necessary to convene a meeting to consider the Resolutions prior to the next annual and general meeting of shareholders of ECL. The application for such order is therefore also denied.

Wilton-Siegel J.

Date: November 28, 2016