'Concept Capital Management Ltd. v. Oremex Silver Inc.' – Ontario Court Sets New Record Date For Shareholders' Meeting To Prevent Manipulation Of Voting Process And Orders Appointment Of Independent Chair

In the context of a proxy fight, Brown J. of the Superior Court of Justice (Ontario) in Concept Capital Management Ltd. v. Oremex Silver Inc.1 ("Concept Capital") had to consider three principal issues:

whether a duly called shareholders' meeting was properly postponed or cancelled by the board of directors of Oremex Silver Inc. ("Oremex"); whether the record date for the rescheduled meeting should be changed in order to prevent shares purportedly issued under a private placement from being voted; and whether an independent Chair should be required for the rescheduled meeting. The Court upheld the postponement of the shareholders' meeting on the basis that it could not conclude, on a balance of probabilities, that the postponement was motivated by an improper purpose or bad faith. However, the Court did conclude that the motivation behind the directors changing the terms of a private placement was to dilute the shares of the existing shareholders in order to enhance the directors' prospects of being re-elected. This constituted improper conduct by the directors. Therefore, the Court set a new record date for the rescheduled meeting in order to protect the Oremex shareholders from the directors' improper conduct, and also agreed to the appointment of an independent Chair.

The reasoning of the Court, particularly as it relates to the basis on which shares can be issued that may impact the results of a contested election of directors, builds on earlier case law and may prove helpful in future contested elections of directors.

BACKGROUND

Oremex is a TSX Venture Exchange ("TSXV") listed mining company. The applicants, Concept Capital Management Ltd. ("CCM") and Sprott Asset Management LP, were holders of 18.9% of the issued and outstanding common shares of Oremex.

On August 2, 2013, Oremex began negotiations with Global Resources Investment Ltd. ("GRIL") to enter into a private placement transaction (the "GRIT Transaction") with Global Resources Investment Trust Plc ("GRIT"), an investment trust to be constituted by GRIL. By September 23, Oremex and GRIL had generally agreed upon the documents to implement the GRIT Transaction.

On August 9, Oremex received a letter from the TSXV stating that the trading of its shares would be suspended pending satisfaction by Oremex of certain reinstatement requirements, including the requirement to hold an annual general meeting - which meeting was overdue. Oremex responded to the TSXV on September 18, undertaking to issue a notice of its 2013 annual general meeting by September 30, and to hold the meeting by November 30. The TSXV replied acknowledging the undertaking and noting that Oremex had a rolling stock option plan that required yearly shareholder approval and thus would need to be approved at the upcoming meeting.

On September 26, CCM requisitioned a meeting of shareholders. On the same day, GRIL submitted an application to the TSXV seeking approval of the GRIT Transaction. The TSXV said that the GRIT Transaction was precedent-setting, and needed time to study it before approval could be granted. As a result, Oremex and GRIL expected at the time that the GRIT Transaction would close on November 8. On September 27, Oremex called a shareholders' meeting for November 26 (the "November Meeting"), with a record date of October 25.

The directors of Oremex were required to mail out the management information circular for the November Meeting by November 4. They did not do so. On November 7, Oremex cancelled the November Meeting and called a meeting for December 31 (the "December Meeting") with a record date of November 29. In spite of the cancellation, the applicants issued a press release on November 8 announcing that the November Meeting would proceed as scheduled, and on November 11 mailed an information circular to all shareholders.

On November 13, Oremex agreed to extend the closing date for the GRIT Transaction to no later than November 30, in order to allow more time to receive regulatory approvals, including approval for listing of GRIT's ordinary shares on the London Stock Exchange (the "LSE"), which was an essential step in the GRIT Transaction.

On November 26, the applicants conducted a shareholders' meeting. The incumbent directors did not attend the meeting and did not recognize the validity of the meeting. The shareholders represented at such meeting voted overwhelmingly to remove the three incumbent directors and elect three new directors.

On November 28, GRIL and Oremex signed off on the amended deal documents for the GRIT Transaction. However, GRIL informed Oremex that the LSE listing would not be complete until about December 31. Nonetheless, on November 29, Oremex closed the GRIT Transaction in escrow, whereby Oremex purportedly raised $1.725 million in financing through the sale of common shares and warrants. As consideration for the purchase of the Oremex securities, GRIT issued to Oremex 1,053,756 subscription receipts (the "Subscription Receipts") exercisable to acquire 1,053,756 ordinary shares of GRIT at £1.00 per share (the "GRIT Shares"). The Oremex securities were issued from treasury and Oremex held those securities in escrow for GRIT pending completion of the listing of GRIT's ordinary shares on the LSE. Pursuant to the terms of the Subscription Receipts, once the listing of the GRIT ordinary shares occurred, the Subscription Receipts would automatically be exercised to acquire the GRIT Shares. Oremex would then sell the GRIT Shares through the LSE to realize the contemplated proceeds.

On December 5, Oremex filed its proxy materials and management information circular for the December Meeting.

COURT'S DECISION

Issue 1: Validity of the November Meeting

Whether the November Meeting was called in response to CCM's requisition

Historically courts have held that it is more difficult for a board to postpone a meeting that was properly called by shareholders, as opposed to a meeting called by the board. The applicants therefore argued that the November...