Bringing corporate governance online: can Atlantic Canadian private issuers leverage tech solutions within the existing statutory framework? Part 1: Virtual shareholders’ meetings
Part 1: Virtual shareholders’ meetings
The escalating COVID-19 crisis, and federal, provincial and local governments’ directives for individuals to comply with social distancing policies, are forcing businesses to re-think traditional corporate governance practices. Questions arise as to whether the applicable business corporations statutes—many of which are decades old—contemplate a shift to virtual meetings and other tech-driven solutions that many Atlantic Canadian businesses are now considering.
This Thought Leadership piece looks at how corporate statutes in Atlantic Canada deal with whether private corporations may hold their shareholders’ meetings by videoconference. Future Thought Leadership pieces will explore the viability of other tech-based corporate governance developments under the current statutory regime.
Broadly speaking, virtual meetings may take one of two forms: a purely virtual meeting, which has no physical location but is conducted entirely by virtual means; or a “hybrid” meeting, which is held at a physical location but which also allows for virtual attendance. While the discussion under each of the four Atlantic Provinces below considers whether a purely virtual meeting is permissible under the applicable legislation, some of the solutions discussed later in this piece contemplate a hybrid meeting.
Regardless of the jurisdiction, a critical question when holding a shareholders meeting—be it the annual general meeting (“AGM”) or a special meeting—is whether the meeting is valid. Validity depends in large part on whether the requisite quorum is met. The applicable quorum, in turn, will vary based on the provisions of the applicable statute and the corporation’s by-laws (or equivalent articles in Nova Scotia). By-laws generally provide that a quorum is a specified number of shareholders or proxyholders holding or representing a threshold percentage of the voting shares. For example, a common quorum is at least two shareholders or proxyholders holding/representing a majority of the shares. It is important for companies to confirm their own quorum requirements.
Under subsection 85(3) of New Brunswick’s Business Corporations Act (the “NBBCA”), shareholders (and others entitled to attend) may participate in a shareholders’ meeting by telephone or other communication facilities, so long as all participants can hear each other and the by-laws allow for it (or, subject to the by-laws, all the shareholders entitled to vote at the meeting consent to it). Such shareholders are deemed to be present at the meeting, which is important in determining whether quorum has been met.
The statutes in some other jurisdictions (including Prince Edward Island—more on that below) require shareholders to be able to “communicate adequately with each other during the meeting.” If a corporation has many shareholders, it is questionable whether a virtual meeting will enable adequate communication; however, the language in the NBBCA is less strict on its face, as it simply requires that participants be able to hear each other (which can be supplemented by allowing shareholders to submit questions, comments and proposals by email to the chair of the meeting in advance of the meeting).
Under subsection 84(1) of the NBBCA, shareholders’ meetings “shall be held at the place within New Brunswick provided in the by-laws, or, in the absence of such provision, at the place within New Brunswick that the directors determine”; subsection 84(2) clarifies that meetings may also be held outside New Brunswick if all shareholders entitled to vote at the meeting agree. The by-laws will often provide that shareholders’ meetings shall be held at the corporation’s registered office or such other place within New Brunswick as the directors by resolution may determine (or outside New Brunswick if all voting shareholders agree). In other words, meetings need to be held at a place. (Subsection 87(1) of the NBBCA further provides that notice of the meeting must be sent to each voting shareholder, each director and the auditor (if any) and must set out, inter alia, the place of the meeting.)
Prince Edward Island1
Under subsection 101(4) of Prince Edward Island’s Business Corporations Act (the “PEBCA”), shareholders (and others entitled to attend) may participate in a shareholders’ meeting by “means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting”, unless the by-laws prohibit such participation. Similar to in New Brunswick, such shareholders are deemed to be present at the meeting for purposes of achieving quorum, which provides flexibility for corporations with shareholders located nationally or internationally.
In addition, subsection 101(5) provides that, so long as the by-laws allow it, the directors or shareholders who call a shareholders’ meeting may direct that the meeting be held entirely by means of a telephonic, electronic or other communication facility that, again, permits all participants to communicate adequately with each other during the meeting. This means that the by-laws must expressly provide for a meeting to be wholly virtual; otherwise, a shareholder may participate virtually in a hybrid meeting under subsection 101(4).
The courts of Prince Edward Island have not yet considered what constitutes an ability to “communicate adequately”, so this standard is open to interpretation. Some practical suggestions regarding efforts to ensure “adequate communication” are set out below.
Under subsection 101(1) of the PEBCA, shareholders’ in-person meetings “shall be held at the place within Prince Edward Island provided in the bylaws or, in the absence of any provision, at the place within Prince Edward Island that the directors determine.” Subsection 101(2) notes in-person meetings may be held outside PEI “if the place is specified in the articles or all the shareholders entitled to vote at the meeting agree that the meeting shall be held at that place.” Similar to New Brunswick, then, shareholders’ meetings must be held at a place.
The Nova Scotia Companies Act (the “NSCA”) neither prohibits nor expressly permits companies to hold their shareholders’ meetings by electronic means. Further, the NSCA does not impose any restrictions as to the “location” of a meeting. Accordingly, Nova Scotia companies must be guided by their constating documents in determining whether a virtual shareholders’ meeting is permissible in the normal course. This is all subject to the common law interpretation of what constitutes a “meeting”, which has traditionally been understood to require physical presence but which could be interpreted more broadly to account for, inter alia, advancements in technology that allow people to come together without requiring physical presence.
In response to the current COVID-19 situation, a Direction of the Minister under a Declared State of Emergency (Section 14 of the Emergency Management Act) was issued on April 11, 2020. The Direction provides guidance to companies under the NSCA (as well as entities under the Co-Operative Associations Act, Societies Act and other bodies corporate incorporated under the laws of Nova Scotia) regarding electronic/virtual shareholder meetings. Entities covered under the Direction are prohibited from holding any statutorily required shareholder or member meetings in-person if doing so would require a gathering of more than five people. Where such a meeting is required, the Direction permits companies to either hold a virtual meeting or defer the meeting, regardless of whether virtual attendance or deferral is otherwise permitted by applicable law or the company’s constating documents.
For the virtual meeting option, the Direction provides that a fully virtual or hybrid meeting may be held instead of a required in-person meeting where the persons entitled or permitted to participate have access to the telephonic, electronic or other communication facility to be used, and such communication facility permits all participants to communicate adequately with each other during the meeting. Such a meeting shall be deemed to constitute an “in-person” meeting and shall be deemed to have been held at the place where permitted in accordance with applicable legislation and the company’s constating documents. Persons who vote at or establish a communications link to be meeting by virtual means shall be deemed to be present at the meeting. All other requirements of the meeting, including the quorum and notice requirements, should be met where they are consistent with the Direction. We note that the authority of the Direction to alter company law requirements for a “meeting” is not clear.
For the meeting deferral option, the Direction provides that a required in-person meeting may be deferred, without penalty or recourse, for a period of up to 90 calendar days after the last date of the declared state of emergency. Where a meeting is deferred, all persons entitled or permitted to be present for the meeting must be notified in advance of the date of the meeting as required by the applicable law and the company’s constating documents (and in any event no less than 7 calendar days in advance of the meeting); and must be provided the notice by any method permitted by applicable law and the company’s constating documents.
The Direction remains in place for the duration of the Provincial State of Emergency, unless it is terminated in writing earlier. Failure to comply with the Direction may result in a summary conviction with fines between $500.00–10,000.00 for individuals and up to $100,000.00 for a corporation per incident.
Newfoundland and Labrador
Similar to Nova Scotia, there is no provision in Newfoundland and Labrador’s Corporations Act (the “NLCA”) either permitting or prohibiting participation in shareholders’ meetings by means of electronic communications facilities. (By contrast, section 188 of the NLCA provides for participation in directors’ meetings by means of telephone or other communications facilities that permit all persons participating in the meeting to hear each other, so long as all directors consent and the by-laws allow for it.)
As in New Brunswick and Prince Edward Island, shareholders’ meetings in Newfoundland and Labrador are required to be held at a place. Section 215 of the NLCA provides that shareholders’ meetings “shall be held at the place within the province that is provided for in the by-laws or, where it is not specified, at the place within the province that the directors determine”, unless all shareholders entitled to vote at the meeting agree to hold the meeting outside of the Province. The corporation’s by-laws will often provide that meetings shall be held at the registered office of the corporation, such other place within the Province as the directors may determine, or such other place within Canada as the directors may determine and all shareholders entitled to vote at the meeting so agree.
Section 235 of the NLCA sets a standard quorum for shareholders’ meetings, requiring that “the holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy.” In Newfoundland and Labrador, it is common for by-laws to provide that a quorum is two persons present in person and each entitled to vote at the meeting. It is also common for the by-laws to provide that only shareholders present in person or represented by proxy shall be entitled to vote.
Based on the language of the NLCA and the language commonly found in the by-laws of corporations incorporated in Newfoundland and Labrador, a corporation holding a purely virtual shareholders’ meeting in Newfoundland and Labrador runs the risk of its shareholders successfully challenging the validity of the meeting.
Considerations applicable to all four provinces
There has been no judicial consideration of whether purely virtual shareholders’ meetings are permitted in any of the four Atlantic Provinces. To further complicate matters, there is an argument that, where the governing statute and corporate by-laws require that a meeting be held at a specific place—or even in a specific province—a fully virtual meeting might, by implication, not be permitted.
At minimum, it is clear that a webcast will not suffice for quorum purposes, as a webcast would not enable shareholders to participate in the meeting in real-time. In addition, as noted above under the New Brunswick section, the “adequate communication” requirement under the Nova Scotia Direction and the PEBCA may be very difficult to meet via a virtual meeting for corporations with many voting shareholders.
In Nova Scotia, the Direction currently in effect should reduce any concerns about a shareholder challenging the validity of a virtual AGM held by a corporation without many voting shareholders. Larger corporations may wish to take advantage of the deferral option offered by the Direction until social distancing measures are relaxed.
Ensuring the validity of a virtual AGM will require some forethought. If there are concerns about the shareholders challenging the validity of a virtual meeting (for instance, on the basis that a quorum wasn’t present at a physical place, or, in Newfoundland and Labrador, that a quorum of shareholders was not present in person), and if it’s feasible to do so, all the voting shareholders may consent in writing to holding the meeting entirely by virtual means in the interest of permitting the corporation to continue to do business. In this case, it may be useful to pass resolutions of both the directors and shareholders addressing the circumstances arising as a result of COVID-19, and approving the use of a virtual shareholders meeting, notwithstanding the provisions of the applicable statute or the corporation’s constating documents. This does not necessarily eliminate the risk of the validity of the meeting being challenged, but it may reduce the risk of any such challenge being found to have merit.
The requirement to hold a meeting may also be bypassed altogether, as the statutes in all four Atlantic Provinces permit a written resolution in lieu of a meeting, provided the resolution is signed by all the shareholders who would have been entitled to vote at the meeting. The feasibility of either option will depend in part on the number of voting shareholders—and whether there is any animosity either among the shareholders or between them and management.
It may not be feasible to get unanimous support for a virtual meeting or to pass a unanimous resolution instead of holding the meeting. In this case, a corporation’s by-laws will often provide that the directors may pass a resolution setting the place within the province where the meeting will be held. Another option, then, is to hold a “hybrid” meeting where there is a physical location at which there is a quorum present in person or by proxy, with the other shareholders participating virtually. In this case, the directors may set the place of the meeting as follows:
- If the quorum is a single shareholder or proxyholder holding/representing a majority of the voting shares: The place where one shareholder or proxyholder, holding or representing a majority of the voting shares, is located.
- If the by-laws are silent on quorum or if the quorum is two (or more) shareholders or proxyholders holding/representing a majority of the voting shares: The place where the requisite number of shareholders or proxyholders (under the by-laws/articles or the applicable statute), together holding or representing at least a majority of the voting shares, can attend in person at a safe social distance from each other.
The notice of the meeting can then indicate that, as part of the corporation’s efforts to slow the spread of COVID-19, all other participants in the meeting must participate by videoconference. In any event, the corporation can (and should) still allow all its shareholders to participate in the meeting by telephone or videoconference, even if they appoint a proxyholder.
Another issue may arise if the corporation’s by-laws restrict voting to shareholders present in person or represented by proxy. A shareholder who does not wish to appoint a proxy but who is not allowed to attend the meeting in-person may attempt to challenge the meeting on the basis that shareholders who did not appoint a proxy were denied the opportunity to vote. The lost opportunity to vote may not ultimately matter if a majority of voting shares were represented by the proxyholder; however, significant time, costs and resources may be expended in dealing with the challenge.
If concerns about a validity challenge can’t realistically be abated in any of the ways set out above, the corporate statutes in all four Atlantic Provinces other than Nova Scotia provide that a director of the corporation may apply to the Court for approval to conduct a virtual shareholders meeting (or to vary the applicable quorum).2 The case law under these provisions is scant. In New Brunswick, for instance, section 97 of the NBBCA was briefly considered once, in Schelew v Schelew, 2005 NBQB 132 , where the New Brunswick Court of Queen’s Bench dismissed an application for an order restricting the defendants’ voting rights and appointing an independent chair of the meeting. The Court held that such an order would have interfered with certain fundamental rights of the shareholders (paras. 30–31), and noted that, as a general rule, “a Court has no jurisdiction to interfere with the internal management of companies acting within their powers in the absence of fraud” (para. 31).
The case law outside Atlantic Canada is more instructive, and one recent case is on point: On March 11, 2020, the British Columbia Supreme Court granted TELUS an order permitting it to hold it its 2020 AGM virtually in light of the COVID-19 pandemic. The order was granted pursuant to the counterpart to section 97 in British Columbia’s Business Corporations Act. Among other things, the order deemed shareholders who participate in the meeting to be present thereat, and deemed the meeting to be held at TELUS’ registered office.
In addition, the Alberta Court of Queen’s Bench in BullRun Capital Inc v GrowMax Resources Corp, 2019 ABQB 107 recently confirmed that Alberta’s counterpart to section 97 “should be given wide scope” and that it “confers upon the Court a broad discretion to order a meeting to be called, held and conducted in the manner that the Court directs”—though this “discretion should be exercised cautiously” given that the legislation is meant to give directors “the general power to manage its business and affairs, including the primary responsibility for determining when shareholders will be consulted and asked to act at meetings” (paras. 108–110).
Earlier, in Atkinson, Re, 2002 ABQB 860, the Alberta Court of Queen’s Bench permitted a corporation’s directors to select a location in British Columbia as the place of the shareholders’ meeting (as this was permitted by the corporation’s by-laws). In so doing, the Court opined that corporations should be permitted to hold their shareholders’ meetings “in a venue which is practically suitable”, and further that, in the absence of improper conduct, directors should have the flexibility to accommodate the shareholders’ needs (paras. 19–20). Arguably, such principles should apply a fortiori to the current situation; a virtual meeting is a practically suitable way to accommodate shareholders’ right to engage in corporate governance in a way that best ensures their safety and is in line with social distancing policies.
Unfortunately, although Court orders are available in theory under the NBBCA, PEBCA and NLCA, it may not be easy to obtain one while courts are operating on a limited basis in response to COVID-19.
For many corporations, the decision to hold a virtual shareholders’ meeting may carry a risk of a validity challenge by disgruntled shareholders. Unfortunately, it may not always be possible for corporations to completely eliminate this risk. However, while there is limited judicial guidance in the four Atlantic Provinces, there are examples in the case law more generally of courts expressing a willingness to recognize technological advancements in communication.
For instance, in Beatty v First Exploration Fund 1987 & Co (1988), 25 BCLR (2d) 377 (SC) the British Columbia Supreme Court noted that “[t]he law has endeavoured to take cognizance of, and to be receptive to, technological advances in the means of communication” (para. 21). The Court in that case held that a faxed proxy is essentially a photocopy of the original and as such be considered as being both “written” and “signed”, and rejected the argument that a faxed proxy is invalid. Such judicial statements can arguably be extended to technological advancements that allow for shareholder meetings to be held entirely by videoconference.
In addition, the Canadian Securities Administrators recently indicated that it is supportive of reporting issuers holding virtual AGMs in an effort to contain the spread of COVID-19:
|The CSA is also aware that some issuers are considering virtual securityholder meetings as a result of social distancing measures. The CSA is supportive of measures issuers are taking to mitigate the risk of transmission and will publish guidance on making changes to annual general meetings as soon as possible. In the meantime, issuers can contact their principal regulator with any questions or concerns.3|
While the CSA’s statement is not directly applicable to private issuers (i.e., most corporations in Atlantic Canada), it demonstrates that at least some regulatory bodies are willing to be flexible when it comes to finding tech-based solutions to “real world” problems.
Finally, if proceeding with a virtual meeting, corporations should consider the following when preparing for the meeting, providing notice to shareholders, and conducting the meeting:4
- When preparing for the meeting:
- contact technology service providers to confirm minimum requirements and to arrange for technical support as appropriate;
- use a platform that will accommodate as many participants as possible;
- test the platform;
- provide plenty of advance notice to persons entitled to attend;
- establish procedures to validate attendees; and
- disclose rules of conduct for virtual participation and guidelines for questions and proposals (including advance submission of questions and proposals, time limits for answers and discussion, and how questions/answers and proposals will be displayed during the meeting).
- Ensure the notice of the meeting includes the following:
- a proxy in the required form,
- an explanation of why the meeting is being held virtually,
- a statement that shareholders are not being denied an opportunity to communicate with management or to ask questions (even if they appoint a proxy),
- how to access the meeting, including any device, browser or internet requirements,
- who to contact if technical support is required,
- when and how to submit questions (and any time, content or other limitations on questions),
- when and how to vote electronically, and
- what video recordings, answers to questions or other information will be available after the meeting.
- When conducting the meeting:
- have technical support available;
- provide a forum for shareholders to present proposals and ask questions; and
- enable and facilitate two-way communication.
Put simply, shareholders must be given the same rights and opportunities as they would in an in-person meeting.
The provinces’ responses to COVID-19, and measures taken to mitigate the spread of the outbreak, are varied and ever-changing. Unless and until provincial governments take definitive legislative action to authorize the types of shifts to virtual governance that many businesses are now forced to contemplate, any corporate-level decisions in this regard will need to be guided by the existing statutory framework, the corporation’s constating documents, and an awareness of the prevailing judicial attitude in each province.
Our Corporate Group is available to assist in navigating this and other corporate governance issues.
1 This article does not contemplate options for for-profit companies incorporated under Part I of Prince Edward Island’s Companies Act (the “PECA”). No statutory right for virtual shareholders meetings exists under the PECA, so reference must be made to the company’s by-laws. If the by-laws do not authorize virtual meetings, the by-laws may be amended, or the company may be continued under Prince Edward Island’s Business Corporations Act (the “PEBCA”). Note that all for-profit PECA companies are required to continue under the PEBCA within three years after the PEBCA came into force (i.e., by 2021). Please contact a member of our Corporate Group for more information.
2 NBBCA, s. 97; PEBCA, s. 113; NLCA, s. 242.
3 Canadian Securities Administrators, “Canadian Securities Regulators to Provide Blanket Relief for Market Participants due to COVID-19” (18 March 2020), online: <https://www.securities-administrators.ca/aboutcsa.aspx?id=1877>.
4 See as well Broadridge Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, “Principles and Best Practices for Virtual Shareholder Meetings” (2018), online: <https://www.broadridge.com/_assets/pdf/broadridge-vasm-guide.pdf>.
This update is intended for general information only. If you have questions about the above, please contact a member of our Corporate Formation/Reorganization Group.
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