Ontario corporations across all sectors are dealing with the issue of their 2020 annual shareholder meetings. In response to the COVID-19 virus, the Ontario government has prohibited meetings of more than five people. Accordingly, in-person shareholder meetings will not be possible for many corporations. Holding the meeting electronically is one solution available to Ontario business corporations (unless the articles or bylaws provide otherwise).
Ontario business corporations are governed by the Business Corporations Act (Ontario) (the OBCA). OBCA corporations must hold their annual meeting within 15 months after the previous annual meeting. As illustrated in the chart below, OBCA companies included in the S&P/TSX Composite Index typically schedule their annual meetings between mid-May and mid-June. The latest that these meetings could be pushed would be mid-August to mid-September.
At this point, we do not know if the COVID-19 crisis will be over in time for corporations to give the appropriate notice and hold in-person annual meetings within fifteen months of their previous annual meeting. On March 31, the Ontario government issued an order (the Order) under the Emergency Management and Civil Protection Act (the Emergency Act) to address this problem. Under the Order:
The Order also permits corporations to hold their annual meetings electronically, even if this is prohibited by articles and bylaws. We note that many shareholders have reservations about virtual meetings and a prohibition against them in the bylaws would normally, but for the Order, allow them to control the format of shareholder meetings. We question whether government action should override the express wishes of the shareholders. A more appropriate approach would be to allow an electronic meeting under these unusual circumstances, provided that the shareholders pass a resolution agreeing to the meeting being held electronically at the outset of the meeting.
One question for all OBCA corporations (public and private) to consider is whether they should rely on the Order. While it is reasonable to generally presume that regulations are valid, there is good reason for concern that the Order extending the time lines for annual meetings and allowing virtual meetings could be challenged. The Emergency Act authorizes Cabinet to make orders for certain purposes and subject to certain conditions. We do not think that it is at all clear that changing the legislative provisions governing shareholder meetings are within the authority given to Cabinet under the Emergency Act.
What would the effect be if a Court found the Order and an annual meeting held in reliance on the Order to be invalid? Simply put, all action taken at that meeting would be of no effect. The directors will not have been validly elected and the directors in office immediately prior to the annual meeting would continue to be directors. If the newly elected board is not identical to the incumbent board, then any actions taken by the newly elected board are likely to be invalid. The effect of such a court ruling would, of course, radiate out to all Ontario corporations that had relied on the Order. Rather than allowing this to occur, a Court might give the government time to pass legislation validating meetings held in reliance on the Order.
Even if the Order is not tested in Court, there may be a cloud over the actions taken at that meeting that could result, for example, in counsel qualifying their legal opinions if the actions taken at that meeting affect the opinion. This could create issues for capital markets and M&A activity.
The uncertainty created by the Order could be fertile ground for dissident and activist shareholders. The solution to this problem is a legislative one. The government should clarify its authority by appropriate amendments to the Emergency Act, eliminating any question of whether the Order is valid. We have shared our concerns with government.