Ontario Superior Court Rules That Section 99 of the Ontario Business Corporations Act Does Not Confer Powers to Bring a Proposal to Remove a Director

October 16, 2024

Written By Robert Staley and Doug Fenton

In OneMove Capital Corporation v Dye & Durham Limited, 2024 ONSC 5114 (OneMove), Justice Penny of the Commercial List division of  the Ontario Superior Court concluded that shareholders may not submit a proposal under s. 99 of the Ontario Business Corporations Act (OBCA) for the purpose of removing a director from office. Section 99 permits a voting shareholder to advance a “proposal” (which is not a defined term under the statute) for consideration by shareholders, and such a proposal may include advancing a candidate for election to the Board. The Court held that a shareholder seeking the removal (as opposed to election) of a director must instead follow the procedure of requisitioning a special meeting of shareholders under s. 105 of the OBCA.

The decision affirms the principle that shareholders wishing to remove a director from office must carefully follow the statutory scheme established by the OBCA and cannot attempt shortcuts. 

Background

OneMove Capital Corporation (OneMove) was a significant shareholder of Dye & Durham Limited. Under a governing Investor Rights Agreement, OneMove was entitled to nominate one director to stand for election to the Board, which nominee-director was subsequently elected by Dye & Durham's shareholders to serve on the Board (the OneMove Nominee). 

In early 2024, OneMove asked the OneMove Nominee to resign from the Dye & Durham Board. The OneMove Nominee refused. At about the same time, a different activist shareholder of Dye & Durham, Engine Capital LP, requisitioned a special meeting of shareholders under s. 105 of the OBCA for the purpose of removing three incumbent directors. Engine Capital LP did not seek to remove the OneMove Nominee. 

Subsequently, in June 2024, OneMove delivered a proposal (the Proposal) under s. 99 of the OBCA to remove and replace the OneMove Nominee at the pending special meeting of shareholders that had been requisition by Engine Capital. OneMove demanded that its Proposal be included on the meeting agenda and in the management information circular to be distributed to shareholders. 

The Board refused. It indicated that while Dye & Durham would nominate OneMove's new nominee to stand for election, consistent with the Investor Rights Agreement, the Proposal was improper. In particular, Dye & Durham took the position that: (1) OneMove could not seek to remove a director through a proposal under s. 99 of the OBCA; (2) the Proposal was improper because its principal purpose was to address a personal grievance between OneMove and the OneMove Nominee director; and (3) the Proposal did not relate significantly to the business or affairs of the company.

The Superior Court's Decision

The Court held that a shareholder cannot use a s. 99 OBCA proposal to remove an incumbent director at a pending meeting of shareholders. Instead, the shareholder itself must requisition a special meeting of the shareholders under s. 105 of the OBCA.

In arriving at this conclusion, the Court found that s. 122 and 123 of the OBCA established a comprehensive regime to govern the process for removing a director. Taken together, the statutory provisions  provide: (1) for the removal of a director at an annual or special meeting (i.e., a special meeting requisitioned in accordance with section 105 of the OBCA), (2) that a vacancy created by such a removal can be filled at the meeting where the director is removed, and (3) that a director is entitled to notice of and to attend and be heard at every meeting of shareholders, and (4) where a director receives notice of a meeting to remove him or her from office, that director is entitled to submit a written statement providing reasons why he or she opposes the proposed action.

Importantly, under s. 105 of the OBCA, a special meeting of shareholders can only be requisitioned by shareholders holding (in the aggregate) at least five percent of the voting shares of the company. By contrast, s. 99 of the OBCA contemplated that any shareholder—irrespective of their shareholdings—could submit a proposal for consideration by shareholders.

In the Court's view, to allow for shareholders to attempt to remove directors through a s. 99 proposal would undermine s. 105, 122, and 123 of the OBCA. While s. 99 of the OBCA is silent on the removal of a director, that silence was intentional and reflected the legislature's policy choice to reserve the ability to requisition a shareholder meeting (including for the purpose of removing directors) to shareholders holding at least 5 percent of the outstanding voting shares.

Consistent with this view, s. 99(4) of the OBCA makes express reference to a proposal to nominate a director by a shareholder holding at least 5 percent of the company's outstanding voting shares at the meeting. The Court noted two important points in reference to s.99(4):

1. the 5 percent shareholder threshold was significant and was aimed at ensuring minority shareholders with little influence and smaller economic stakes do not become "pesky shareholders" and consume meetings with "costly, time-consuming and potentially disruptive" proposals; and
2. s. 99(4) indicated that the Legislature had turned its mind to shareholder proposals in relation to directors, and intentionally did not provide for a mechanism for Board members to be removed under s. 99.

As a result, while OneMove held more than 5 percent of the voting shares of Dye & Durham and could have itself requisitioned a special meeting of shareholders to remove the OneMove Nominee, it could not achieve that same result by way of a proposal under s. 99 of the OBCA.

Key Takeaways

Where a shareholder looks to remove a director from office, the shareholder must carefully follow the correct procedures under the OBCA (or equivalent federal or provincial corporate legislation). The Court will strictly construe the requirements of the OBCA and require compliance with the statutorily mandated process. Shareholders wishing to take such action should not attempt to take short cuts.

If you have further questions about the OneMove decision or corporate governance litigation issues more generally, please contact the authors or a member of the Bennett Jones Shareholder Activism and Critical Situations team or Securities Litigation group.

The authors are grateful for the assistance of Emma Danaher, student-at-law, in connection with the preparation of this article.

Authors