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DIRECTORS AND OFFICERS - Election of directors - Removal

Monday, March 22, 2021 @ 9:22 AM  

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Appeal by Baylin Technologies and 2385796 Ontario from a decision dismissing their application for an order requiring Gelerman to tender his resignation as a director of Baylin, as required under Baylin’s majority voting policy, and other declaratory relief. Pursuant to a 2018 asset purchase agreement, Baylin acquired from Spacebridge the undertaking and assets of Spacebridge’s satellite and radio frequency, terrestrial microwave and antenna equipment and services business. Gelerman was the founder of Spacebridge and its president and CEO. It was a condition to the closing of the 2018 agreement that Baylin enter into the Consulting Agreement with Spacebridge. The Consulting Agreement provided for consulting services to be provided by Gelerman, in his capacity as CEO. The amounts due under the Consulting Agreement were to be paid out over a two-year period. Baylin was listed on the Toronto Stock Exchange (TSX) and was required to adopt a Majority Voting Policy to comply with the TSX rules. At the 2019 Annual General Meeting, Gelerman only received 29 per cent of the eligible votes for his re-election. 2385796 and other shareholders withheld their votes relative to Gelerman’s election. Gelerman did not submit his resignation as required by Baylin’s majority voting policy. The application judge found that Baylin’s majority voting policy did not comply with the TSX majority voting requirement. He found that both Spacebridge and Gelerman had an expectation arising from the background leading up to the 2018 Agreement and its terms that Gelerman would be a director of Baylin for the two-year period. The application judge also found that they had a reasonable expectation that Baylin would act honestly and in good faith in assisting Gelerman to be elected to the Baylin board for the two years in issue. The application judge also found the policy to be a breach of Gelerman’s reasonable expectations as a director and that it was oppressive, unfairly prejudicial to, and disregarded Gelerman’s role as a director. The application judge was satisfied that the reason the majority voting policy was drafted in the manner it was, was to enable the removal of Gelerman as a director of Baylin.

HELD: Appeal allowed. The application judge erred in his conclusion that votes withheld were not votes cast and therefore did not count in the election results. The TSX policy was clear that votes withheld were votes against a director. The application judge’s misunderstanding of this central aspect of the TSX majority voting policy affected his approach to, and view of, the Baylin majority voting policy and led him to find that the Baylin voting majority policy also did not comply with the TSX policy because the Baylin policy stipulated only three situations that would constitute exceptional circumstances. There was nothing in the TSX policy that precluded a corporation from stipulating, in advance, what it would consider as exceptional circumstances. The judge’s oppression conclusion appeared to be based entirely on the adoption of the majority voting policy. The errors that the application judge made respecting the majority voting policy clearly drove his conclusion regarding what he saw as oppressive conduct. He erred in his finding regarding the reasonable expectations of Gelerman and Spacebridge. While Gelerman might himself have believed that he would remain a director for the two-year period, that expectation was not objectively reasonable. All that Gelerman obtained, as part of the 2018 Agreement, was an undertaking by Baylin that it would nominate Gelerman for election to its shareholders and would honestly and in good faith assist Gelerman to obtain the votes necessary for election. The basis for the judge’s conclusion that the majority voting policy was passed for removing Gelerman as a director was the application judge’s erroneous understanding of the background to, and need for, the majority voting policy. The application judge’s conclusion that the Baylin policy was oppressive and unfairly prejudicial and unfairly disregarded both Gelerman’s and Spacebridge’s reasonable expectations arose from his misunderstanding of the policy. It was a conclusion that was fundamentally flawed and led to a palpable and overriding error respecting his finding of oppression.

Spacebridge Inc. v. Baylin Technologies Inc., [2021] O.J. No. 320, Ontario Court of Appeal, D.H. Doherty, I.V.B. Nordheimer and A.L. Harvison Young JJ.A., January 26, 2021. Digest No. TLD-March222021002