Ontario court denies director removal proposal under s. 99 of the OBCA

In OneMove Capital Corporation v. Dye & Durham Limited, 2024 the Ontario Superior Court of Justice considered, among other issues, whether OneMove Capital Corporation, a shareholder of Dye & Durham Limited (D&D or the company), could make a proposal under s. 99 of the Business Corporations Act (Ontario) (OBCA) to remove a director mid-term.

The court denied OneMove’s application for an order requiring that D&D include OneMove’s proposal in a circular for an upcoming special meeting of shareholders (requisitioned by another shareholder for another purpose), effectively closing the door on using a s. 99 proposal to remove an incumbent director. Practically, this means a director can only be removed mid-term by an ordinary resolution passed at a special meeting of shareholders called for such purpose, pursuant to a meeting requisition under s. 105 of the OBCA. 

In 2020, OneMove and Plantro Ltd. entered into an investor rights agreement, which among other things, provided OneMove with the right to nominate one director to D&D’s board. OneMove’s nominee was and continues to be Mr. Prittie. During 2022-2023, OneMove raised concerns about D&D’s governance and performance, speaking frequently about such matters with Mr. Prittie and the chair of the board. In early 2024, after learning of certain developments regarding the company’s search for a new board chair and a recently completed equity offering, OneMove lost confidence in Mr. Prittie and asked him to resign as a director of D&D.  Mr. Prittie refused to do so.

Subsequently another shareholder, Engine Capital LP, requisitioned a special meeting of shareholders under s. 105 of the OBCA to remove three incumbent directors (excluding Mr. Prittie) and elect three new nominees. In connection with such requisitioned meeting, OneMove delivered a proposal to the company under s. 99 of the OBCA to remove Mr. Prittie as a director of D&D. D&D advised OneMove it would not be including such proposal in the special meeting circular, based on the statutory grounds for rejecting s. 99 proposals under s. 99(5)(b) and (b.1).  

Central issue and Superior Court of Justice decision

The central issue before the court was whether a shareholder can make a proposal to remove a director under s. 99 of the OBCA, and if “yes,” then does the proposal fail under s. 99(5)(b) or (b.1) because it clearly appears that the primary purpose is to enforce a personal grievance or does not relate in a significant way to the business or affairs of the company?

The court held that a s. 99 proposal cannot be used to remove a director and OneMove’s application for an order requiring that D&D include its proposal in the circular for the requisitioned special meeting was denied.

Justice Penny noted that, while s. 99(1) of the OBCA provides any registered holder of voting shares with the right to submit a proposal to raise at a shareholders meeting and s. 99(4) provides that such proposal may include nominations for the election of directors if the proposal is signed by shareholders representing 5% or more of the voting shares, the OBCA pays significant attention to due process where the removal of a director is concerned (including in ss. 122 and 123). 

In rejecting OneMove’s argument that a 5% threshold could be read into s. 99(4) for proposals to remove directors, Justice Penny reasoned that if the legislature intended to include the removal of directors by a s. 99(4) proposal, it would have expressly done so. Instead, to remove a director mid-term, shareholders must requisition a special meeting for that purpose and cannot simply rely on a s. 99 proposal to “tag-along” to a different meeting called for a separate purpose.

Although Justice Penny’s determination on using s. 99 proposals for removing directors was dispositive of the proceedings, he briefly considered whether D&D had met its onus of showing under s. 99(5) of the OBCA that compliance with ss. 99(2) and 99(3) was not necessary due to (a) an improper purpose of the proposal, or (b) the proposal not relating in a significant way to the business and affairs of the company. 

Justice Penny determined that D&D had not met its onus. D&D alleged that OneMove’s director removal proposal was motivated solely by OneMove CEO’s personal animosity toward Mr. Prittie as a result of Mr. Prittie’s refusal to accede to OneMove’s demands as its nominee. Justice Penny noted that despite alleged demands by and conflict between OneMove’s CEO and Mr. Prittie, Mr. Prittie’s alleged shortcomings as a director were tied to a perceived failure to consider OneMove’s concerns about the company’s direction that had been raised over two years before the removal proposal. 

Further, on its face, a shareholder motion to remove a director relates to the business and affairs of the company. As such, if OneMove had been allowed to rely on a s. 99 proposal to remove a director, D&D would not have been entitled to reject it on the basis of s. 99(5) and would have been required to include it in the special meeting circular.

Take-away 

This decision clarifies that a shareholder cannot rely on a s. 99 proposal to remove a director, even if the director is that shareholder’s nominee. To attempt to remove a director, a shareholder should wait until the issuer’s annual general meeting or, if thought necessary to remove the director mid-term, requisition a special meeting specifically for that purpose.