On February 1, 2023, our Special Situations team successfully obtained an order from the Ontario Superior Court of Justice (Commercial List) requiring that First Capital Real Estate Investment Trust (First Capital) accelerate the holding of a requisitioned special meeting of its unitholders (the Unitholders). In doing so, Kimmel J. analyzed First Capital’s board of trustees’ (the Board) decision-making process and concluded that the Board had failed to give effect to the Unitholders’ fundamental right to requisition a special meeting, and to have the meeting held expeditiously. The decision offers valuable insight into the process and considerations that should inform a board’s decision on the meeting date in response to a requisition, and when an activist may wish to consider challenging such a decision.
Background
Sandpiper Group (Sandpiper) and Artis Real Estate Investment Trust (Artis) are both significant unitholders of First Capital. On December 12, 2022, Sandpiper delivered a formal requisition (the Requisition) calling for a special meeting of Unitholders, at which the Unitholders would vote on a proposed replacement of four of the Board’s trustees – including the Board’s Chair (the Requisitioned Meeting). Pursuant to the Requisition, Sandpiper and Artis sought the Requisitioned Meeting to be held by no later than March 1, 2023. The Requisition was also accompanied by the publication of a detailed presentation setting out their criticisms of the Board’s performance, including specific concerns relating to First Capital’s “Optimization Plan” that planned for the disposal of approximately $1 billion in assets over a two year period.
On December 14, 2022, the Board decided that the annual and special meeting of the Unitholders should be held on May 16, 2023 – more than five months after the delivery of the Requisition. This decision was announced on December 30, 2022. Sandpiper and Artis subsequently brought an application to compel First Capital to hold the Requisitioned Meeting as soon as practicable after March 1, 2023.
The Key Considerations – Business Judgment vs. Unitholder Democracy
Kimmel J. noted that the court must defer to the business judgment of the Board, provided that the Board’s decision falls within a “range of reasonableness” or unless the Board is shown to have acted for an improper purpose. On the other hand, Kimmel J. also stressed that the right to requisition a meeting is a “fundamental right” of the Unitholders, and an important protection against board conduct, such that the Court should take a “good hard look” at the Board’s decision.
i) Did the Board’s Decision Warrant Deference from the Court?
Kimmel J. held that the Board failed to demonstrate they had engaged in “scrupulous deliberations” with the appropriate level of prudence and diligence. In considering the Requisition, the Board held a single two-hour meeting, during which other agenda items were considered. Moreover, the very directors whom Sandpiper and Artis sought to replace via the Requisition were present at the meeting and indeed led the discussion to set the Requisitioned Meeting date. As such, it was held that the Board’s process was not robust, independent, or objective, and did not warrant a high level of deference from the Court.
ii) Was the Meeting Called Expeditiously and within a Reasonable Time?
“In the abstract”, Kimmel J. noted that First Capital’s five month delay in holding the Requisitioned Meeting was unreasonably long. Kimmel J. also examined the justifications given by the Board for setting the Requisitioned Meeting date on May 16, 2023. The Board’s justifications were as follows:
- By combining First Capital’s annual general meeting (which was typically held in June) with the Requisitioned Meeting, the Board would prevent the cost and distraction of holding two Unitholder meetings in quick succession;
- A delay of the Requisitioned Meeting would allow the Optimization Plan to unfold, thereby providing the Unitholders with an opportunity to assess First Capital’s performance under the Optimization Plan; and
- A delay of the Requisitioned Meeting would provide Unitholders with more time to consider the issues to be addressed at the Requisitioned Meeting, by, for example, providing the Unitholders with the financial statements for the first quarter of 2023.
Cost and Distraction: Kimmel J. found the Board’s first rationale to be unconvincing. She noted that the estimated cost savings for combining the two meetings constituted only 0.1% of First Capital’s revenues, and First Capital had previously held Unitholder meetings in close succession with each other with a good track record for Unitholder turnout. While cost and distraction are typically desirable to avoid, Kimmel J. did not find these factors to be compelling in this particular case given First Capital’s size and financial resources.
Allow the Optimization Plan to Unfold: Kimmel J. similarly found the Board’s desire to permit the Optimization Plan to unfold to be unreasonable. First, the Board had failed to identify any future steps it would take that would assist the Unitholders in their deliberations on the Optimization Plan. Absent an identified event that could better assist the Unitholders, it was found that “simply waiting to see if something might happen […] [was] not a reasonable justification to delay.” Moreover, Kimmel J. identified that the Board was, in effect, making determinations about the business that the Unitholders wanted to have considered at the Requisitioned Meeting: the Unitholders’ objective in introducing new trustees to oversee the Board’s implementation of the Optimization Plan would “at the very least [be] diminished, even if not rendered moot, by allowing the existing Board to continue with its implementation for any longer than is justifiably necessary”.
More Time for Unitholders to Consider the Issues and Engage: Kimmel J. rejected First Capital’s third rationale given that the timing of the release of First Capital’s first quarter of 2023 financial statements meant that the statements would not be prepared in time to be included in the meeting materials for the May 16, 2023 meeting. Furthermore, First Capital had expressly informed the Unitholders in its December 30, 2022 press release that there was “no need for [the Unitholders] to take any action in respect of the meeting.” Consequently, the Unitholders were not effectively gaining any additional time to consider the materials for the meeting.
Conclusion & Takeaway
Kimmel J. held that the Board failed to call the Requisitioned Meeting expeditiously, and ordered First Capital to hold the Requisitioned Meeting as soon as practicable after March 1, 2023.
This decision is a reminder that even though boards are generally provided with significant deference in their decision-making, a court will carefully scrutinize the board’s conduct in a contested situation, and will intervene in cases when a board has not acted with an appropriate degree of prudence and diligence. Although each case will turn on its specific facts, a few general takeaways from this are as follows:
- Five months is generally excessive when it comes to scheduling a requisitioned meeting, absent compelling justification;
- Process matters. Not all cases will require the same degree of process, but the absence of good process will amplify concerns in cases with lengthier delays and less than compelling justifications. In contrast, good process can help buttress a decision that may otherwise be called into doubt; and
- Be specific. A board should not merely echo justifications for meeting dates that are set out in the case law, particularly if they have decided to schedule a meeting with delay on the longer end of the spectrum. The justifications for the meeting date should be tailored to the actual circumstances.
The Norton Rose Fulbright team represented Sandpiper and Artis in this matter, and was led by Orestes Pasparakis (Partner, Litigation and Co-Chair of our Canadian Special Situations Team), Stephen Taylor (Partner, Litigation), Walied Soliman (Canadian Chair and Co-Chair of our Canadian Special Situations Team), and Heidi Reinhart (Partner, Business Law), and was supported by Mark Laschuk (Associate, Litigation).