When Are Boards Required to Hold a Requisitioned Shareholders Meeting?

Published on: March 2023 | What's Trending

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How long do Boards have to hold a meeting requisitioned by a shareholder?

That is a question clients often ask, and the answer is typically something like “within a reasonable timeframe of typically less than 6 months”. Given this range can involve half of a Company’s calendar/fiscal year, and two entire quarters, you can excuse clients – dissidents and issuers aside – from being far from satisfied with that answer.

Interestingly, the Ontario Superior Court of Justice’s decision in Sandpiper Real Estate Fund 4 Limited Partnership v. First Capital Realty Real Estate Investment Trust (First Capital) sheds some light on this very question while seemingly curbing the bounds of board discretion. In essence, while the court left the timing of meetings to the business judgment of directors, it found that such judgment must be reasonable. In this case, that meant ordering an earlier meeting three and a half months after requisition – as opposed to the 5 month lead-time sought by the Board.

How the Conflict Arose

In First Capital, an activist fund owning approximately nine percent of First Capital requisitioned a special meeting of unitholders to be held no later than three and a half months later. In this meeting, they sought to remove four members of the First Capital Board of Trustees.

First Capital responded with an announcement of a special meeting and annual general meeting more than two months after the date requested, five months from requisition. The activist fund asked the Court to compel the meeting to be held on the earlier date they had requested.

How Much Deference Should Be Given to the Business Judgment of the Board?

The Court noted that the business judgment rule specifies that when a board’s decision falls within a reasonable range, courts should defer to that judgment. To the average observer, it might seem reasonable to defer the specially-called meeting for a short while in order to combine it with an annual general meeting when financials were available. However, the court disagreed.

The Court noted that the Board held only a single meeting to discuss the requisition, and that such meeting also covered many other issues. Moreover, the four directors that were up for replacement remained present during the meeting and voted on the decision to hold the meeting five months later – not even acknowledging potential conflict of interest issues. Similarly, the Board appeared to devote so little time to discussing the timing of the meeting as to not display the reasonably-desired degree of diligence. As a result, the court found that the decision of the Board was entitled to a lesser degree of deference.

Was the Timeframe Reasonable?

After determining that the Board’s decision regarding the timing of the meeting was entitled to a lesser degree of deference, the Court examined three reasons the Board provided for waiting five months to hold the requisitioned shareholders meeting. The Court found none of the reasons compelling and therefore determined that the Board failed to hold the meeting within a reasonable time and, by extension, the delay was not reasonable or justified.

The Court then ordered First Capital to hold the meeting as soon as possible after the date originally requested.

Lessons for Boards

Board members can learn some important lessons from First Capital. First off, going through the mere mechanics of calling a board meeting and noting a discussion on the agenda will not be enough – courts will look more granularly at what was substantively discussed and how much actual consideration was given to the decision. In First Capital, the decision suggests that the Board’s consideration of the meeting timing (only once, within a broader meeting with other topics) was more mechanical and an afterthought to a host of other topics addressed. Put differently, meeting minutes should explain the factors considered by the board before determining a meeting date. Moreover, if there are potential conflict of interest issues, they should be identified and given the appropriate level of consideration.