Using Bylaws Tactically – Possibilities and Pitfalls

Author(s): Laura Fric, Jeremy Fraiberg, Kevin O’Brien, Clay Horner

July 16, 2015

There has been a recent increase, both in Canada and the United States, in the tactical use of company bylaws to address a variety of corporate issues. Much of the development has been directly driven by increased shareholder activism. Companies may use bylaws to introduce additional procedural regulation to activist initiatives, whereas activists may seek to adopt bylaws giving shareholders more direct authority to affect corporate action and procedures. Advance notice bylaws, which require that a company be provided with advance notice of shareholder proposals at meetings in order to prevent a potential ambush, have recently become commonplace in Canada and have been a longstanding fixture of the corporate landscape in the U.S.  Forum selection bylaws, which designate the jurisdiction in which any shareholder litigation against a company must take place, have been adopted by three new Canadian special purpose acquisition companies, following the lead of a number of U.S. corporations.  Some Delaware companies also adopt fee-shifting bylaws, which require the loser to pay the costs of both sides in any Canadian litigation alleging breach of duties.

When using bylaws tactically, a key challenge is ensuring the bylaw does not contravene corporate law, which may limit the scope of bylaws to certain prescribed areas. Challenges to bylaws on this basis have led to extensive litigation in the U.S. And while Canadian litigation in the area has been comparatively limited, there have been some noteworthy decisions.  In Wells v. Melnyk^[1], the court found that a shareholders’ meeting at which a new slate of directors was elected had not been properly constituted, where the board improperly sought to amend the company’s bylaws immediately prior to the meeting to reduce the number of shares needed to constitute a quorum. Advance notice provisions have also been subject to challenge in Canada. See, for example, Orange Capital, LLC v. Partners Real Estate Investment Trust^[2] (where the issue was whether the provisions of a REIT’s advance notice policy had been complied with), and Northern Minerals Investment Corp. v. Mundoro Capital Inc.^[3] (where a challenge to the enforceability of an advance notice by-law under B.C.’s governing corporate statute was dismissed).

An interesting issue arose in a recent case with which Osler was involved (but which settled without determination of the issue): can a company’s bylaws be used to permit delegation of a board power that, under governing legislation, is non-delegable? In the circumstances of this case, the particular issue was whether a single director, if authorized by bylaw, could call a special meeting of shareholders. On a strict reading of Ontario’s Business Corporations Act^[4] (the OBCA), the power to call a shareholders meeting and submit matters to shareholders for a vote can only be exercised by the entire board. Section 127(1) of the OBCA grants a board authority to delegate to a managing director or committee of directors “any of the powers of the directors.” However, this authority is expressly curtailed by section 127(3), which lists certain core corporate governance powers that the board cannot delegate. This list includes the power to “submit to the shareholders any question or matter requiring the approval of the shareholders”^[5]. Section 94 further provides that it is the “directors” of a corporation (plural) who have the authority to “at any time call a special meeting of shareholders.” The non-delegability of the right to call a shareholders meeting was also considered in the context of the Canada Business Corporations Act^[6] in the 2009 decision in JLL Patheon Holdings v. Patheon Inc.^[7] In Patheon, Wilton-Siegel J. held that

“a decision of whether or not to call a shareholders meeting to consider removal of existing directors and the election of a new slate of directors would be a matter caught by section 115(3) of the CBCA [the parallel section to s. 127(3)] and, as such, would be non-delegable.”

There does exist, however, at least some commentary supporting the notion that a company’s bylaws can authorize a single director to call a shareholders meeting, notwithstanding the language of the OBCA^[8]. And other jurisdictions make clear that such a power is delegable. For example, British Columbia’s Business Corporations Act ^[9] places no limitation on the powers of the directors that can be delegated. To the contrary, section 137 of the B.C. Act provides that ”the articles of a company may transfer, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the company to one or more other persons.” This would include the right to call a shareholders meeting, as the B.C. legislation contains no corresponding qualifier akin to section 127(3) of the OBCA.

In light of the above, the better view appears to be that, at least in Ontario, it is only the fully constituted board of a company that has the authority to call a shareholders meeting. But the issue has not been judicially determined. A determination either way could have significant repercussions, given that the issue of bylaws providing for action by a minority of directors or directly by shareholders in matters the governing statute designates as non-delegable extend to many critical corporate matters, including but not limited to the declaration of dividends, the repurchase of shares and the making of take-over bids.

More generally, this case highlights the potential possibilities and challenges associated with the tactical use of bylaws.  The area continues to be one of increasing activity, and the usage and types of such bylaws will certainly continue to evolve. While Canadian jurisprudence in the area has to date been limited, the increase in attention and usage – particularly in circumstances that may present tension with governing legislation – may very well be subject to change.

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