The limits to proxy disqualification and chair deference in AGMs:
Skychain offers fresh insight on advance notice provisions

The Supreme Court of British Columbia recently released its decision in 1154557 B.C. Limited v. Skychain Technologies Inc., a case in which the court addressed the invalidation of shareholder proxies in connection with a contested annual general meeting, and provided guidance on interpreting advance notice provisions in company articles or by-laws, the procedural fairness owed to shareholders, and limits on the deference owed to the chair of a shareholder meeting.

Background

Skychain Technologies Inc. faced significant shareholder unrest following a period of financial losses, management turnover, and a shift in business strategy. Dissident shareholders of Skychain, including 1154557 B.C. Limited (the Petitioner), sought to replace Skychain’s board by nominating an alternative slate of directors at Skychain’s 2024 annual general meeting (the AGM). The Petitioner gave notice pursuant to the advance notice provisions in Skychain’s articles of incorporation with details of its board candidates and issued a dissident proxy circular soliciting “yellow proxies” in support of its slate. 

Skychain’s management, citing alleged deficiencies in the dissident group’s advance nomination notice—specifically, an alleged failure to disclose arrangements with other shareholders and connections to a former Skychain CEO—declared invalid the yellow proxies, which represented a majority of the voting shares of Skychain. As a result, management’s slate of directors was acclaimed. 

The Petitioner sought relief under the shareholder oppression provisions of the Business Corporations Act (British Columbia) (the Act), and the court ultimately found in favour of the Petitioner. 

Shareholder democracy and oppression

Under section 227 of the Act (which is similar to corporate statutes in other Canadian jurisdictions), a shareholder may apply to the court for relief where the company’s affairs or directors’ powers are being exercised in an oppressive or unfairly prejudicial manner as against the shareholder—known as the “oppression remedy.” 

To be entitled to relief, the applicant must first show it had a reasonable expectation with respect to the conduct of the company’s affairs and, secondly, this reasonable expectation was violated by oppressive or unfairly prejudicial conduct. The court recognized that proxy voting in the election of directors is a right “fundamental to shareholder democracy,” from which it follows that shareholders have a legitimate expectation that dissident proxy initiatives will be “fairly considered and properly addressed” at shareholder meetings in accordance with applicable laws and the company’s constating documents. 

The court determined that the AGM chair’s decision to invalidate the yellow proxies procedurally and substantively offended the Petitioner’s reasonable expectations relating to the voting of shares at the AGM and, therefore, the AGM was conducted in a manner that was oppressive or unfairly prejudicial to the Petitioner. 

Shareholders’ procedural expectations and the limits to a chair’s discretion

The court affirmed that while a meeting chair is generally afforded deference, the AGM chair’s refusal to provide any explanation for invalidating the dissidents’ yellow proxies—either before or during the AGM—was oppressive or unfairly prejudicial to those who had completed such proxies. 

Meeting chairs’ rulings are reviewable if they (i) involve an error of law or (ii) are otherwise unreasonable. The court stated shareholders can reasonably expect the chair of a contested meeting to give some explanation for the consequential decision to reject a class of proxies, particularly where it represents, as it did here, greater than a majority of the voting shares. However, Skychain’s AGM chair provided no explanation for his decision to disqualify the yellow proxies. 

The standard set by the court is not onerous. The reasons provided by an AGM chair for a procedural decision need not be “elaborate,” the court noted. The standard merely requires that some explanation be provided. However, mere “general and conclusory assertions” may not suffice to satisfy shareholders’ reasonable expectations. To do so, chairs must support any conclusions with adequate facts and particulars. 

Moreover, Skychain shows that an AGM chair’s omissions may give rise to a doubt as to the chair’s impartiality. The AGM chair’s and Skychain counsel’s “coordinated refusal” to offer even a cursory explanation for the ruling suggested the chair was “simply doing management’s bidding.” This violated the dissident shareholders’ reasonable expectation that the ruling would be made by an impartial chair and some explanation would be provided. 

Implications for advance notice provisions

Further, the court refused to uphold the AGM chair’s reasoning for rejecting the proxies, which the court found was based on Skychain’s assertion that the Petitioner’s advance nomination notice and dissident proxy circular did not comply with its advance notice provisions, which required disclosure by the nominating shareholder of “full particulars regarding any proxy, contract, agreement, arrangement or understanding pursuant to which such Nominating Shareholder has a right to vote or direct the voting of any shares of [Skychain].” 

Skychain argued the Petitioner had not met the requirements because it did not disclose that it was acting jointly and in concert with other shareholders to elect the dissident slate. However, on a strict reading of the wording of Skychain’s advance notice provisions, such disclosure was not required as the collaboration with other shareholders did not give the nominating shareholder “a right to vote or direct the voting of any shares.” 

The court contrasted Skychain’s provision with broader formulations used elsewhere that require disclosure of arrangements “relating to” the voting of securities or “acting jointly or in concert.” Skychain’s advance notice provisions did not contain that language, and the court declined to read it in. As a result, the court found that the chair’s decision to disqualify the yellow proxies also could not stand on substantive grounds, as it was based on an incorrect and unreasonable interpretation of Skychain’s advance notice provisions. 

Additionally, the court rejected Skychain’s argument that securities laws required broader disclosure of relationships and coordination among the Petitioner and other shareholders, finding this is not a requirement of item 5(b) of Form 51-102F5, which requires disclosure of “each person or company by whom, or on whose behalf, directly or indirectly” the proxy solicitation is made. 

Takeaways

• Expect to give reasons in contested meetings. Meeting chairs should provide clear, timely, non-conclusory explanations for consequential rulings, especially those affecting shareholder rights. Failure to do so can result in a loss of the presumption of deference and findings of oppression.  
• Maintain and demonstrate impartiality. Meeting chairs should be careful to avoid acting in a manner that could be perceived as doing management’s bidding. Use an independent chair in contested situations where practicable. 
• Companies must calibrate their advance notice by-laws or provisions to achieve their objectives. If the intent is to capture coordination among shareholders “relating to” voting or joint actor situations, the by-laws or provisions should be drafted clearly and broadly enough to not inadvertently limit a nominating shareholder’s disclosure requirements.