COURT FILE NO.: CV-22-0069010300 DATE: 20240521 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
IN THE MATTER OF an Application Under Section 182 of the Business Corporations Act, R.S.O.1990 c. B. 16;
AND IN THE MATTER OF Rule 14.05(2) and 14.05(3) of the Rules of Civil Procedure;
AND IN THE MATTER OF a Proposed Arrangement of Amsterdam Square Apartments Inc.
BEFORE: Penny J.
COUNSEL: Megan Marrie for the Applicant, Amsterdam Square Apartments Inc. Stephen M. Turk for Brenda Smith
HEARD: March 22, 2024
reasons for JUDGMENT
Overview
[1] Amsterdam Square Apartments Inc. owns and operates a 25-unit apartment building (the Building) on St. Clair Avenue in Toronto. Although Amsterdam Square (or, the Corporation) is an Ontario business corporation, it is set up and run akin to a non-profit residential equity co-operative. Amsterdam Square brings this application for an order approving a plan of arrangement proposed by the Board and supported by about 75% of the shareholders/unitholders. The purpose of the Arrangement is to lower the voting majority thresholds in the Corporation’s articles of incorporation from the stipulated 100% or 90% for certain actions (such as the passing of by-laws) to the two-thirds majority required in the definition of a “special resolution” in the OBCA.
[2] As I will explain in the reasons below, I find, on the essential issue in dispute, that the application is premature and, on that basis, must be denied. Specifically, I find that: a) the necessity for the amendments has not been demonstrated to the requisite degree; and b) the plan lacks sufficient detail explaining what the Board actually plans to do by way of Bylaw amendment if the Articles are amended to reduce the 90 and 100% voting requirement thresholds. This order is made without prejudice to the applicant seeking approval for and bringing another application under s. 182 if the recommended additional steps set out below are taken and the appropriate level of consensus among the shareholders still cannot be reached.
Background
[3] Amsterdam Square was incorporated in 1984. The Corporation owns the Building. Each shareholder holds shares in the Corporation generally allocated in proportion to the square footage of the occupier’s unit. Amsterdam Square is managed by a board of directors which is elected by the shareholders. The Corporation has Articles of Incorporation and Bylaws. Since incorporation, the Articles have been amended on several occasions. The most significant amendments occurred in 1986. At that time, the Articles were amended to provide that the business of the Corporation is restricted to providing non-profit housing to the shareholders. The original shares were cancelled. Each shareholder was issued a new series of preferred shares and a new series of common shares (thus, 25 series of each in total, one series for each unitholder). Again, the new series were issued roughly in proportion to the size of each shareholder’s unit. The preferred shares are non-voting and entitle each preferred shareholder to an occupancy licence which confers the exclusive right to occupy the shareholder’s unit. The common shares entitle each holder to one vote per share. Common shareholders may receive dividends and other property distributions.
[4] Although there are 25 units in the Building, there are more than 25 owners of shares because some shares are owned jointly by more than one resident.
[5] At the heart of this application and the current dispute are two Articles (Articles 4.4 and 4.6) which establish requirements of either 100% shareholder consent, or 90% shareholder consent, to make certain changes to the Articles or Bylaws.
[6] The relevant provisions of Article 4.4 provide that 100% shareholder consent is required to:
(a) change any maximum number of shares the Corporation is authorized to issue;
(b) create any new class of shares;
(c) add, change or remove any rights, privileges, restrictions and conditions attached to any share or any class or series of shares;
(d) change the shares of any class or series into a different number of shares; or
(e) change, in a manner adverse to the interests of any shareholder, any provision of the by-laws of the Corporation regarding the collection of money or the use and occupation of the Building or the level of shareholder approval required for anything.
[7] The relevant provisions of Article 4.6 provide that 90% shareholder consent is required to:
(a) purchase or otherwise acquire for value any of the Corporation’s shares or distribute any property;
(b) add, change or remove any restrictions on the transfer or ownership of any shares or the number of shareholders;
(c) borrow money or assume or grant any mortgage on the Building;
(d) make any improvements or renovations of the Building having an aggregate cost of over $30,000 in any 12 month period; or
(e) issue any Series 105 shares.
[8] Obviously, in regard to those matters subject to a 100% threshold, any one shareholder can prevent a proposed change. In addition, the shareholdings are such that any three shareholders can prevent the 90% threshold from being achieved. Over time, the Board came believe that these requirements for shareholder approval were unnecessarily high and were hindering the Corporation’s ability to take actions which, the Board believed, would be in the interests of Amsterdam Square and the shareholders as a whole.
[9] Several circumstances lead the Board to this conclusion.
Unit 105 and the Issue or Reallocation of Common Shares
[10] The number of common shares allocated to each series of shares (each unit is issued its own “series” of common shares) is notionally based on the square footage of that unit. The number of common shares allocated to each unitholder as a proportion of all common shares issued determines the amount of their annual maintenance fees and special assessments, as well as the number of votes each unitholder may cast at a shareholder meeting. The number of common shares allocated to each series is set out in Article 5.1. Article 4.4(d) requires the consent of all common shareholders to any reallocation of common shares.
[11] Unit 105 was originally not allocated common shares because it was held by the corporation and used to house a live-in building superintendent. In 2010, the Board dismissed the live-in superintendent and contracted for live-out building superintendent services. This action, it was thought, would enable the Corporation to sell common shares allocated to unit 105 and increase contributions toward overall maintenance fees. Under Article 4.6(ii)(g), a majority of 90% of the votes cast is required to issue any series 105 shares. The original resolution was defeated with 71.4% in favour and 28.6% against. The Board’s proposal, therefore, did not receive the requisite unanimous consent under the Articles. Unit 105 sat empty.
[12] The Board returned to this issue in 2014 when it again sought shareholder approval to issue series 105 shares. At the time, about 9% of the common shareholders were in default due to unpaid arrears of common element fees; those shareholders were, as a result, ineligible to vote or consent. At a shareholder meeting called for a vote on the Board’s proposal, the holders of 95% of the shares not in default and therefore eligible to vote or consent gave written consent to the resolution, thereby exceeding the 90% threshold. The issuance of a 105 series was therefore approved. This did not end the matter, however, and unit 105 continued to remain empty.
[13] The further problem started with the fact that, over the years, certain alterations had been made to units 105, 105A and 406 which materially altered the square footage of those units. In an effort to rectify this issue, the Board retained a professional measuring company, Planit, to make laser-based measurements of the square footage of all 25 units in the Building. The Planit measurements showed that there are discrepancies between the actual square footage and the number of common shares allocated to every unit. While many of these discrepancies are minor, the discrepancies are significant (exceeding 100 square feet) in the case of units 105, 301, 306, 401 and 406. This led to an extensive, as yet unresolved, debate among the shareholders about whether and how to reallocate series shares. As noted, Article 4.4(d) requires unanimous shareholder consent to any reallocation of common shares among units.
[14] In 2018, the Board proposed a special resolution to reallocate the common shares in accordance with the Planit measurements. There were two information sessions, followed by a shareholder meeting to vote on the proposed resolution. Five shareholders refused to consent and the special resolution did not pass.
[15] A revised scheme of reallocation was proposed in 2019. Again, two information sessions were held, followed by a shareholder meeting to vote on a proposed special resolution. Two shareholders voted against the proposal; again, the resolution did not pass.
[16] Having already received the requisite majority to issue series 105 shares, the Board decided to proceed with issuing and selling the series 105 shares to a new owner based on the existing allocation. That, at least, ended the period of vacancy which had existed since 2010. The Board did so, however, subject to a condition that the buyer of the series 105 shares agree that the number of common shares allocated to unit 105 might increase and that the buyer consent to the proposed special resolution increasing that allocation for unit 105. The Board also decided that its consent to the transfer of any other share series would be conditional on consent to the special resolution by the prospective purchaser. Since that time, five other share series (105A, 106, 206, 303, 305) have been transferred to new shareholders, all of whom agreed to the same condition and consented to the special resolution.
Sub-Licensing
[17] Section 4.05 of the By-laws provides that sub-licencing of a unit by a shareholder of that unit requires the approval of the Board, not to be unreasonably withheld. There are no guidelines or criteria for the exercise of this discretion. Over time, wildly divergent views developed among the shareholders about when and how this discretion ought to be exercised. The Board’s proposal to adopt a set of guidelines by way of Bylaw amendment generated a “storm of controversy”. Bylaw changes involving the use and occupation of units in the Building require 90% shareholder approval under Article 4.6.
The Sale of a Shareholder’s Shares
[18] A similar problem existed regarding the sale of a shareholder’s shares in Corporation. Board approval is required but there are no criteria or guidelines. Some shareholders want to be free to sell to anyone, including a person who has no intention of residing in the Building but only seeks to own and rent as a business investment. Other shareholders want all sales restricted only to committed residents. Article 4.6 requires 90% shareholder support to add, change or remove any restrictions on the transfer of shares. The Board wishes to amend the Bylaws to provide guidelines for the exercise of their discretion. It does not believe it will be able to achieve 90% consent from the shareholders for such amendments.
Capital Expenditures
[19] Finally, in 2020, the Building required roof, cornice and brickwork repairs. An interpretation dispute arose over whether the Board required shareholder approval for the required capital expenditures. Some shareholders reacted angrily to the Board’s decision to undertake repairs of close to $200,000 without first obtaining shareholder approval. Article 4.6 stipulates 90% shareholder approval required for expenditures over $30,000 in any 12 month period. In this case, the Board went ahead with the repairs in spite of some shareholder opposition. However, the Board considers this an “unhappy state of affairs” because the Articles have an unrealistically low threshold and fail to distinguish between repairs which are “necessary” and those which are “discretionary”.
Genesis of This Application
[20] As a result of these four problems in particular, it became apparent to the Board that the Articles and Bylaws were “in dire need of revision” but that it was “impractical” to attempt to engage in further discussions with shareholders about these issues given the existing majority requirements of 90% to 100% shareholder approval.
[21] In an attempt to balance efficiency and accountability, the Board decided to propose a corporate reorganization under which the Articles would be by way of special resolution to change certain of the majority requirements from 100% and 90% to a 2/3 majority. One set of proposed reductions in majority support were to amend Article 4.4 to reduce the 100% shareholder consent requirements to a 2/3 consent requirement for:
(a) changing any maximum number of shares the Corporation is authorized to issue;
(b) creating any new class of shares;
(c) adding, changing or removing any rights, privileges, restrictions and conditions attached to any share or any class or series of shares;
(d) changing the shares of any class or series into a different number of shares; or
(e) changing, in a manner adverse to the interests of any shareholder, any provision of the by-laws of the Corporation regarding the collection of money or the use and occupation of the Building or the level of shareholder approval required for anything.
[22] The second set of proposed reductions in majority support were to amending Article 4.6 to reduce the 90% shareholder consent requirement to a 2/3 consent requirement regarding the ability of the Corporation to:
(a) purchase or otherwise acquire for value any of the Corporation’s shares or distribute any property;
(b) add, change or remove any restrictions on the transfer or ownership of any shares or the number of shareholders;
(c) borrow money or assume or grant any mortgage on the Building;
(d) make any improvements or renovations of the Building having an aggregate cost of over $30,000 in any 12 month period; or
(e) issue any Series 105 shares.
[23] The shareholders were initially asked to review the proposed revisions in the form of a shareholder resolution and to indicate, by signing a consent form, whether they were in favour of the proposed changes. If there was support from 2/3 of the shareholders, the Board said, it would call a special shareholder meeting to consider proceeding with an application for approval of a plan of arrangement to effect the amendments proposed. Holders of only 62.5% of the shares (that is, short of the 2/3 majority requirement for a special resolution under the OBCA) consented to the resolution; 20% were opposed and the remaining shareholders did not respond to the Board’s request.
[24] Having failed to obtain the 2/3s majority it had initially asked for, the Board went back to the drawing board and made further changes to the amendments being proposed in order, among other things, to clarify the voting requirements and make them consistent with the OBCA definition of a special resolution. These revised amendments were detailed in a further letter to the shareholders in preparation for a town hall meeting to discuss the revised proposed amendments. After the town hall meeting, the Board sent a further letter to the shareholders addressing various concerns expressed at the town hall meeting about the proposed amendments. The letter included a comparison chart and table setting out the proposed amendments and the specific wording of the provisions of the Articles that would be amended. The Board also advised the shareholders that it intended to call a special general meeting of the shareholders to consider a special resolution to proceed with implementing the proposed amendments to the Articles by way of a plan of arrangement.
[25] In August 2022, a notice of meeting and information package was issued to the shareholders calling for a special meeting of the shareholders. On September 8, 2022 the special meeting was held during which the shareholders voted on the special resolution to implement the proposed amendments by way of the arrangement, In the vote, 72.74% of the shareholders voted in favour of the special resolution to implement the proposed changes to the Articles by way of an application to approve a plan of arrangement.
[26] Three shareholders did not attend the special meeting and so did not vote on the proposed amendments. These three shareholders subsequently confirmed in writing that they supported the proposed amendments and arrangement. Factoring in the support of these additional shareholders, the shareholder approval percentage rate rose from 72.74% to 75.39%.
[27] This notice of application was duly served on the shareholders of the Corporation. One shareholder, Brenda Smith (represented by Mr. Turk) filed a notice of appearance, responding material and factum, opposing the application and the order sought. It is common ground that 3 other shareholders wish the Court to be aware that they support Ms. Smith’s position opposing the resolution and application.
Analysis
Legal Framework
[28] The Court has authority to approve an arrangement pursuant to section 182(5)(f) of the OBCA. In determining whether to approve an arrangement, the Court must have regard to whether:
(a) the statutory procedures of s. 182 of the OBCA have been met;
(b) the application has been put forward in good faith; and
(c) the proposed arrangement is fair and reasonable.
Statutory Procedures
[29] Section 182 of the OBCA requires:
(a) that a proposed arrangement falls within the definition of an “arrangement” under subsection (1);
(b) a corporation proposing an arrangement must “prepare, for the approval of the shareholders, a statement thereof setting out in detail what is proposed to be done and the manner in which it is proposed to be done”;
(c) that “where an arrangement has been approved by shareholders of a corporation…by special resolution, the arrangement shall have been adopted by the shareholders of the corporation and the corporation may apply to the court for an order approving the arrangement”; and
(d) a corporation that applies to the court under subsection (5) “shall give the Director notice of the application…”.
Good faith
[30] I take the requirement for good faith in this context to refer to honesty or lawfulness of purpose and that the actions of the Board in bringing the application were not done for ulterior, undisclosed or improper purposes.
Fair and Reasonable
[31] In determining whether a proposed arrangement is fair and reasonable, the court must be satisfied that: (i) the arrangement has a valid business purpose; and (ii) the objections of those security holders whose legal rights are affected are being resolved in a fair and balanced way: BCE Inc. v. 1976 Debentureholders, at para. 143. These two prongs of the fair and reasonable test are not watertight compartments but may interact with one another in the overall analysis.
[32] The Court considers a variety of factors, none of which is conclusive; their relevance varies from case to case. Relevant factors may include: a) the vote by security holders on the arrangement; b) the impact on the rights of those security holders; c) the necessity of the changes proposed to implemented by the arrangement; d) the approval of the arrangement by the corporation’s directors and the presence of a fairness opinion; and e) the access of shareholders to dissent and appraisal remedies The outcome of the shareholder vote is an important indicator of whether a plan is fair and reasonable which can be given “considerable weight”, particularly if the margin is large: Magna International Inc. v. The Bank of Nova Scotia, at para. 38, although the outcome of the vote is not determinative: BCE Inc. v. 1976 Debentureholders, para. 150.
[33] The valid business purpose prong of the fair and reasonable analysis recognizes the fact that there must be a positive value to the corporation to offset the fact that rights are being altered. In other words, the court must be satisfied that the burden imposed by the arrangement on security holders is justified by the interests of the corporation. The proposed plan of arrangement must further the interests of the corporation as an ongoing concern: BCE Inc. v. 1976 Debentureholders at para. 145.
[34] An important factor for the court to consider when determining if the plan of arrangement serves a valid business purpose is the necessity of the arrangement to the continued operations of the corporation. Necessity is driven by the circumstances faced by the corporation. One indicator of necessity is the existence of alternatives to the plan. The degree of necessity of the arrangement is important to the court’s level of scrutiny. As Austin J. said in Canadian Pacific Ltd. (Re) (1990), 1990 ONSC 6767, 73 O.R. (2d) 212 (H.C.), p. 223: “while courts are prepared to assume jurisdiction notwithstanding a lack of necessity on the part of the company, the lower the degree of necessity, the higher the degree of scrutiny that should be applied”: cited in BCE Inc. v. 1976 Debentureholders, para. 146.
[35] When there are conflicting interests, the court must also be satisfied that the arrangement strikes a fair balance between the different groups of conflicting interests. The court must be careful not to cater to the special needs of one particular group but must strive to be fair to all involved in the transaction depending on the circumstances that exist. The overall fairness of any arrangement must be considered as well as fairness to various individual stakeholders: BCE Inc. v. 1976 Debentureholders, para. 148.
[36] If the plan of arrangement is necessary for the corporation’s continued existence, the court will more willingly approve it despite a prejudicial effect on some security holders. Conversely, if the arrangement is not mandated by the corporation’s circumstances, the court will be more cautious and should undertake a careful analysis to ensure that the arrangement does not, for example, unduly favour the interests of some shareholders over others: BCE Inc. v. 1976 Debentureholders, para. 146.
[37] No arrangement is perfect and that is not the test. What is required is a reasonable decision in light of the specific circumstances of each case The court should refrain from substituting its view of what it considers the “best” arrangement. At the same time, the court should not surrender its duty to scrutinize the arrangement and its effect on all shareholders. Because s. 182 facilitates the alteration of legal rights, the court must conduct a careful review of the terms of the proposed arrangement: BCE Inc. v. 1976 Debentureholders, para. 155.
Analysis
[38] The central issue in dispute concerns whether the proposed arrangement is fair and reasonable. However, as Ms. Smith has raised arguments in relation to the statutory and good faith requirements, I will address those as well.
Statutory Requirements
[39] Ms. Smith argues that the voting thresholds laid out in the Articles cannot be changed or amended by a plan of arrangement under s. 182. She advances two arguments. First, she argues that amending the articles of a corporation can only be achieved under s. 168 of the OBCA. I do not accept this argument.
[40] Section 182(1) specifically provides that an “arrangement” includes, among other things, “the addition to or removal from the articles of the corporation of any provision that is permitted by this Act to be, or that is, set out in the articles or the change of any such provision”. Further, s. 182(6) expressly contemplates a proposed plan of arrangement which “involves an amendment of the articles of a corporation”.
[41] Thus, I conclude that s. 182 is available to effect a change to the articles of a corporation.
[42] Ms. Smith’s second argument arises from the provisions of s. 5 of the OBCA dealing generally with a corporation’s articles. Section 5(4) provides that “if a greater number of votes of directors or shareholders are required by the articles or a unanimous shareholder agreement than are required by this Act to effect any action, the provisions of the articles or of the unanimous shareholder agreement prevail.” Ms. Smith argues that the proposed arrangement, based on s. 182, purports to utilize a two thirds majority for approval of the arrangement providing for amendments to provisions of the Articles which, by their terms, require 90% or 100% shareholder support. She therefore submits that the Articles, not the provisions of s. 182, must prevail. I am unable to accept this argument either.
[43] The concept of an arrangement carries with it its own code of procedure. That procedure is essentially one of obtaining shareholder approval and court approval and of court supervision of the process: Olympia & York Developments Ltd. v. Royal Trust Co., 1993 ONSC 9428, para. 53. The concept of an “arrangement” exists primarily to deal with proposals that do not quite fit other categories under the legislation: Savage v. Amoco Acquisition Co. 1998 ABCA 148, p. 191. The provisions of s. 182 are wide enough to permit the court to approve an arrangement even if it is contrary to some other provision of the OBCA: P.L. Robertson Manufacturing Co. 1974 ONSC 589, p. 357.
[44] The arrangement provisions were created to provide a broad and flexible remedy to address difficult or complex problems. An arrangement may incorporate whatever tools and mechanisms of corporate law the ingenuity of their creator brings to the particular problem at hand. The arrangement provisions preserve and facilitate this flexible approach to the resolution of corporate problems between companies and their shareholders: Olympia & York Developments Ltd. v. Royal Trust Co., para 48.
[45] Section 182(6) provides that where a reorganization or scheme is proposed as an arrangement and involves an amendment of the articles of a corporation or the taking of any other steps that could be made or taken under any other provision of this Act, the procedure provided for in this section, and not the procedure provided for in such other provision, applies to such reorganization or scheme.
[46] In the circumstances, given the broad, flexible and remedial purposes of s. 182, if there is a conflict with the general provisions of s. 5(4), I conclude that the provisions of s. 182 prevail. I therefore conclude that s. 5(4) does not, as a matter of statutory interpretation, prohibit an amendment of the voting thresholds in the Articles by way of a plan of arrangement under s. 182 of the OBCA.
[47] Apart from these issues, the formal statutory requirements of s. 182 have been met. The arrangement falls within the meaning of an “arrangement” under s. 182(1)(b) and(h) as it involves a corporate reorganization under which the Articles would be amended to change the majority requirements for shareholder approval of certain actions. The corporation provided the requisite statement under s. 182(2) of the OBCA to shareholders in an information package on August 24, 2022, together with a Notice of Meeting for the special general meeting. [1] The special general meeting was held on September 8, 2022, at which time 72.74% of votes were cast approving the special resolution to implement the proposed amendments by way of the arrangement. This, obviously, met the two thirds requirement for a special resolution. Several shareholders who did not attend the meeting subsequently indicated, in writing, that they supported the resolution, bringing the level of shareholder support to just over 75%. The arrangement was adopted by the shareholders and the Corporation subsequently brought this application for an order approving the arrangement. Finally, the Director was provided with the notice of the application as well as the draft Articles and a draft court order. The Director confirmed the material is acceptable for filing.
Good Faith
[48] Ms. Smith argues that the directors have not acted in good faith. Her main reason for taking this position is that, in their first communication about this proposal, the directors indicated that if there was support from 2/3 of the shareholders at the initial meeting, the Board would call a special shareholder meeting to consider a resolution that the Board initiate an application for approval of a plan of arrangement to effect the amendments proposed. However, holders of only 62.5% of the shares present at the initial meeting (that is, short of the 2/3 majority requirement) consented to the resolution.
[49] In spite of the Board’s stated intention, Ms. Smith submits, and having failed to obtain support from two thirds of the shareholders, the Board nevertheless (after making further revisions to its proposals) proceeded with a special meeting to consider a special resolution to bring an application for approval of an arrangement which contained proposed amendments to the majority voting thresholds. This failure to adhere to its own preconditions, Ms. Smith argues, constitutes bad faith. I do not agree.
[50] While it is true the original proposal did not garner two thirds majority support at the initial shareholder meeting, the proposal tendered at that meeting was not the proposal in respect of which the Board called a meeting to vote on the special resolution. The Board took the feedback it received as a result of the initial meeting and then presented a different, revised proposal in a special resolution for a vote by the shareholders. There is nothing duplicitous or contradictory in this behaviour. The Board gave no undertaking that the initial meeting was to be the last word on the subject. In my view, the Board not unreasonably took the feedback from that meeting to heart, revised its proposal to respond to some of the concerns expressed and then brought the revised proposal back to the shareholders for a vote, which did receive the requisite level of support. The Board’s approach in these circumstances was perfectly reasonable and is not evidence of a lack of good faith.
[51] The circumstances of this case are unusual. While the Corporation is a business corporation under the OBCA, the Articles require that the business of the Corporation be restricted to providing shareholders with housing units as their principal residences for tax purposes and that “the Corporation shall be operated as a non-profit co-operative housing corporation as nearly as possible at cost after providing reasonable reserves.” This is a provision of the Articles requiring 100% shareholder support to change and the proposed arrangement would not amend that requirement. Although the Corporation is obviously not a condominium corporation, its circumstances are somewhat analogous in light of the restrictions cited above. Boards of condominium corporations are “charged with the responsibility of balancing the private and communal interests of unit holders”: Cheung v. York Region Condominium, 2017 ONCA 633, para. 14, citing Orr v. Metropolitan Toronto Corp. No. 1056, 2011 ONSC 4876, para. 1. I agree with the applicant that the Board’s responsibilities in the particular context of this Corporation extend to the interests of all the shareholders as a group qua unitholders; in other words, to the communal interests as well as the private interests of individual shareholders. In my view, the evidence in the record supports the conclusion that the Board has, at the very least, sought to balance those communal and private interests and has taken the steps it has in relation to the proposed arrangement in a good faith pursuit of that objective.
Fair and Reasonable
[52] This brings me to what is, in my view, the “real” issue in dispute in this application -- whether the proposal is fair and reasonable to the shareholders. Ms. Smith makes two arguments that it is not.
[53] Her first argument is that there is no “fairness opinion” from an independent financial advisor or from a lawyer.
[54] I am unable to agree that this is in any way a deficiency of the application in the circumstances of this case. A fairness opinion from a financial advisor is typically appended to an application for approval of a plan of arrangement because the rights of the shareholders are being arranged in a manner that will have a material impact on the entity in which they will continue to be shareholders, including the value of that entity. A common example is a proposed plan in which the shareholders’ shares will be acquired in exchange for shares in a new, combined entity. In these circumstances, the relative value of what they owned before the arrangement is implemented and what they will own after the arrangement is implemented is a material consideration in the “fairness” of the proposed plan of arrangement. That is what is being addressed in the typical fairness opinion.
[55] This is not the situation here. There is no evidence, or even suggestion, that the proposed amendments to the Articles will have any material impact on the market value of the units and/or the shares which represent the unitholders’ licence to occupy the unit associated with their shares. In the absence of any evidence that this is a material concern, I cannot agree that the lack of a fairness opinion renders the proposal unfair or unreasonable.
[56] There is no evidence about what a legal opinion would add, or why it would even be admissible, given that the legal issues in dispute are matters of Ontario law which is for the court, not a lawyer witness, to decide.
[57] The real issue arises from two related concerns: a) the “necessity” for what the Board proposes to do weighed against the effect/intrusion on the rights of the shareholders; and b) concern about the lack of detail setting out what the Board will actually do if and when the proposed voting thresholds are implemented.
The Board Position
[58] The specific problems which the Board says it needs to address, and which are the reason for the proposed amendments to the Articles, are:
(a) reallocation of shares based on updated square footage measurements;
(b) sublicensing criteria
(c) share transfer criteria; and
(d) increase of the threshold for capital expenditures not requiring shareholder approval.
[59] It became clear during the course of argument that the constraints on the Board taking action on these matters, in most cases, arise from the broad and generic nature of the majority thresholds required for actions taken under Articles 4.4 and 4.6. The Board acknowledges that, apart from the capital expenditure threshold, the specific problems will have to be addressed, following the removal of the 90 and 100% majority requirements, by further consultation and the drafting and approval of new or amended Bylaws. This is made clear, for example, from the Board’s June 30, 2022 letter to shareholders. The letter states:
The steps to end this unhappy stalemate are clear. First, we must reduce the majority requirements. Then we can call a meeting of shareholders to eliminate redundant or contradictory clauses. Then we can begin the hard work of reforming the governance documents to create a corporate that balances fairness, accountability and efficiency.
[60] Essentially, the Board has concluded that, because there is a recalcitrant minority of shareholders, there is no point in pursuing, under the existing governance structure, the specific Bylaw amendments it believes are required because the Board believes it will never get the 90 or 100% shareholder majority required for these changes.
Ms. Smith’s Position
[61] Ms. Smith argues that it is neither fair nor reasonable to propose sweeping changes to broad protections available to the shareholders under the existing Articles without having first exhausted all efforts to achieve the desired changes within the existing governance structure. For example, she agrees that the threshold for capital expenditures should be increased but points out that no specific proposal has ever been put the shareholders to determine whether 90% approval is available for such a change.
[62] Ms. Smith also argues that the proposed amendments go far beyond what is necessary to deal with the specific four problems the Board is trying to solve. She argues that lowering the voting threshold from 100% to 66.67 % to change or remove any maximum number of shares that the Corporation is authorized to issue could dilute her shareholdings and negatively impact her investment in the Corporation. Similarly, lowering the voting threshold from 100% to 66.67 % to enable the Board to change the designation of or add, change or remove any rights, privileges, restrictions and conditions attached to any shares of any class or series of shares could once again have a negative impact on Ms. Smith’s share value and her investment in the Corporation. Nor has the Board explained why it needs to lower the voting threshold from 90% to 66.67 % to allow for the purchase of its shares, distribute any property or forgo any right on a reduction of stated capital or, indeed, to mortgage the assets of the Corporation, all of which could again have a negative impact on individual shareholders and the value of their investment.
[63] In short, Ms. Smith takes the position that the necessity for the sweeping changes of the Articles being proposed has not been demonstrated. The Corporation has functioned for decades under the existing governance structure and continues to do so. Specifically, it is not clear why the broad swath of the proposed amendments are required to achieve the relatively modest goals of reallocation of shares based on current square footage, sublicensing criteria, share transfer criteria, and increasing the threshold for capital expenditures. It is not clear what else the Board may have in mind once the voting majority thresholds are lowered. There is a real concern about the law of unintended consequences.
Analysis
[64] Neither of these competing positions is frivolous in the circumstances. The Board would have a very real problem of efficient day to day management if everything it needed to do were constrained by a 90 or 100% majority shareholder requirement. The “tyranny of the minority” can be a very real problem in many cases. I am sure the Board is very frustrated by the actions of a small minority who appear to be blocking fairly simple, indeed obvious, measures.
[65] Having said that, the choices made by the stakeholders when the Articles were implemented, and the fact that each shareholder was aware of the constraints embodied in the Articles when they acquired their interests in the Corporation, are significant factors, not to be taken lightly: 1107051 Ontario Ltd. v. GG Kingspa Enterprises Limited Partnership, 2022 ONSC 1847.
[66] I have concluded earlier that the Corporation has the capacity to seek, and the court has the jurisdiction to grant, the changes to the Corporation’s Articles in the manner currently proposed. However, I have concluded in the unique circumstances of this case that the Corporation’s application is premature. I come to this conclusion for the following reasons.
[67] I am guided in reaching this conclusion by the words of the Supreme Court in BCE Inc. v. 1976 Debentureholders cited above: the lower the degree of necessity, the higher the degree of scrutiny that should be applied. I appreciate the Board is frustrated by the hurdle of the 90 or 100% voting majority requirement and the perception that, if it pursues an effort to amend the Bylaws under the existing governance structure, all of its efforts may come to naught if there remains, however unreasonably, a sufficient group (one or three, as the case may be) of recalcitrant shareholders at the end of the day.
[68] However, the details matter. Section 182(2) of the OBCA requires that the proposal must set out in detail what is proposed to be done and the manner in which it is proposed to be done. Here, the Board’s approach has been to leave the details of the specific manner of solving the current practical deadlocks (by way of Bylaw amendments) until phase two; that is, following the approval of the proposed changes to the Articles lowering the voting majority requirements.
[69] I accept that the level of detail to be provided in any given case is a question of judgment. However, here the changes to the Articles being proposed are broad and dramatic yet the stated purposes of the Board in seeking this relief are relatively modest. New Bylaws are, in any event, going to be the means of remedying the specific problems the Board is trying to address. In my view, the specific proposals of the Board to change the Bylaws to facilitate efficient management of the matters giving rise to this application (that is the four specific problem areas set out above) ought to be before the shareholders and the court as part of the “fair and reasonable” analysis.
[70] Accordingly, the Board must undertake the process of drafting these Bylaws and seeking consensus among the shareholders for the proposed changes. If, having done so, the requisite support cannot be achieved, the Corporation will be at liberty to propose a new special resolution to approve a fresh application under s. 182 of the OBCA. The Board’s efforts in drafting the Bylaws and seeking consensus will not have been wasted, in any event. If there are unreasonably recalcitrant shareholders still barring required changes, they will be called upon to justify their objections knowing that, under s. 182 of the OBCA, the court is not bound by the voting majority thresholds in the existing Articles. At that point, the evidence is more likely to be sufficient to demonstrate both the necessity for the application and to disclose sufficient detail about the manner in which the arrangement is proposed to be carried out. In other words, the principal deficiency in the current application will have been remedied. The path will be open to the court to approve a plan of arrangement with the benefit of full disclosure and evidence that the Corporation has tried to obtain shareholder support on the basis of that more detailed record.
Conclusion
[71] For the forgoing reasons, the application by the Corporation for approval of the proposed plan of arrangement is denied as being premature. I find that the plan does not meet the fair and reasonable requirement because, in the circumstances: a) necessity has not been demonstrated to the requisite degree; and b) the plan lacks sufficient detail explaining what the Board actually plans to do by way of Bylaw amendment if the Articles are amended to reduce the 90 and 100% voting majority thresholds. I make this order without prejudice to the Corporation seeking another special resolution approving an application under s. 182 if the further efforts of the Board, as outlined above, does resolve the problem.
Costs
[72] I required the parties to submit partial indemnity cost summaries. The applicant seeks about $27,000. Ms. Smith seeks about $40,000. Mr. Turk requested the opportunity to make submissions on costs regardless of the outcome. Given that Ms. Smith was successful in her opposition to the application, further submissions are not required. Having regard to all the relevant factors, including what the losing party could reasonably expect to pay, I find that partial indemnity costs, inclusive of fees, disbursements and applicable taxes, shall be awarded to Ms. Smith in the amount of $30,000, payable by the Corporation.
Penny J.
Date: May 21, 2024
[1] Ms. Smith objects to the sufficiency of the directors’ statement “setting out in detail what is proposed to be done and the manner in which it is proposed to be done.” For purposes of technical compliance, I find the directors’ statement meets the s. 182(2) requirement. I will discuss Ms. Smith’s substantive concerns about the sufficiency of the proposal under the “Fair and Reasonable” discussion below.