Majority Voting Policy Found to Be Oppressive
Considerations for Director Elections During COVID-19
With the economy and the capital markets absorbing the impact of COVID-19, the 2020 proxy season is about to begin. Plunging stock prices can lead to investor dissatisfaction, which can in turn be reflected in shareholder votes. Majority voting (required for TSX listed issuers) allows shareholders to vote down director candidates nominated in an uncontested election. It is the one mechanism shareholders have to hold individual directors accountable (other than calling a special meeting to remove a director). Could majority voting be misused, to achieve a result other than director accountability to shareholders? Earlier this year, an Ontario court found that the majority voting policy of one issuer had done just that.
It is rare for directors of TSX listed issuers to be voted down in uncontested elections. Last year, only 12 of the more than 5,700 directors nominated in uncontested elections were voted down. This was more than the previous three years combined, but still a very small number. Ten of those 12 directors resigned. In each case (except for one), the board accepted the director’s resignation (though not always on a timely basis).
In one of the two cases in which the director refused to resign, that director was removed by the shareholders several months later, at a special meeting called for that purpose.
The other case involved David Gelerman, a director of Baylin Technologies Inc. (TSX:BYL). Mr. Gelerman was the CEO of Spacebridge Inc., which sold its satellite and radar frequency, terrestrial microwave and antennae business to Baylin in 2018. As required in the sale agreement, Mr. Gelerman was appointed to the Baylin board and was put forward to shareholders as a candidate for election at each of the 2018 and 2019 annual meetings. Baylin had committed to assisting Mr. Gelerman in obtaining the votes required to be elected. Mr. Gelerman was elected at the 2018 annual meeting, but by the time of the 2019 annual meeting, Baylin and Spacebridge were engaged in a dispute relating to the transaction. Mr. Gelerman was voted down at the 2019 annual meeting under Baylin’s newly adopted majority voting policy.
When the Spacebridge transaction closed, Baylin chair Jeffrey Royer was the company’s controlling shareholder. A transaction in August 2018 diluted his holding to 49%. Because Baylin no longer had a controlling shareholder, it was required by the TSX to adopt a majority voting policy. The board received advice that the majority voting policy recommended to it aligned with the TSX requirements and the policy was approved and in place for Baylin’s 2019 annual meeting. Mr. Royer was among the shareholders who did not vote in favour of Mr. Gelerman’s election and Baylin advised Mr. Gelerman that he had been voted down under the terms of the Baylin majority voting policy and must resign.
Rather than resign, Mr. Gelerman applied to the court for an order to allow him to complete his term. The Court found that Baylin’s majority voting policy had been drafted in order to enable the removal of Mr. Gelerman as a director without violating the terms of the sale agreement. The Court found that the policy did not in fact align with the TSX requirements and that the advice to the board regarding the policy had been false and misleading. The Court held that the policy was oppressive and unfairly prejudicial and unfairly disregarded both Gelerman’s and Spacebridge’s reasonable expectations, specifically in Gelerman remaining a director for the period of the earn-out.
The Baylin case addresses a long held concern among some that majority voting policies can be abused. The Ontario Superior Court’s decision validates that concern and provides guidance for issuers, directors and investors on the appropriate use of majority voting policies. Baylin is appealing the decision – a Court of Appeal decision on majority voting could provide important additional guidance.