In Baylin Technologies Inc. v. Gelerman, 2021 ONCA 45 the court considered the application of the Toronto Stock Exchange’s (“TSX”) majority voting policies, the application by the appellant of its own voting policies and whether the respondent’s reasonable expectations as a director had been offended.
Baylin was commenced as an Application to enforce a provision in an Asset Purchase Agreement (“APA”) between two corporations, Baylin and Spacebridge Inc. The APA contained a clause mandating that Gelerman – the founder, President, and CEO of Spacebridge – would be appointed to Baylin’s Board of Directors, and that he would be nominated for re-election for the next two years. The APA required the company to act honestly and in good faith in assisting Gelerman in securing the necessary votes to be re-elected. At Baylin’s 2019 Annual General Meeting, Baylin’s largest shareholder – 2385796 Ontario Inc. – withheld its vote to re-elect Gelerman to the Board. Based on the company’s majority voting rules, Gelerman was required to resign after failing to obtain a majority of the vote for re-election and the corporation was required to accept his resignation, barring exceptional circumstances. Gelerman did not resign.
The court below concluded that Baylin’s majority voting policy was invalid and set it aside on the basis it did not comply with the TSX’s majority voting policies which the court interpreted as requiring only the counting of votes cast as opposed to the counting of all votes available to be cast. Further, unlike the TSX policies, the Baylin policy limited the exceptional circumstances in which the corporation did not have to accept a resignation. The lower court judge concluded that Gelerman had a reasonable expectation that he would remain on the Board for at least two years after signing the APA and that the corporation would act honestly and in good faith in helping him secure the necessary votes.
On appeal, Baylin succeeded on the basis the court below had misinterpreted the TSX policies and fundamentally misunderstood Baylin’s policy. The parties all agreed that the TSX policies did require the counting of withheld votes in determining whether a majority had been achieved as a contrary result would mean a candidate with only a single vote could succeed. The purpose of a majority voting policy, according to the Court, is to “provide a meaningful way for security holders to hold directors accountable and remove underperforming or unqualified directors” (para. 38). Further, there was nothing in the TSX policies that precluded corporations from stipulating what constituted an exceptional circumstance in which a resignation did not need to be accepted, and so it was open to Baylin to adopt specific exceptions. The appeal court found Baylin’s policy to be compliant with the TSX guidelines.
The appeal court also reviewed the lower court’s oppression remedy analysis. It found that a palpable and overriding error had been committed, which negated any deference that would have normally been owed to the lower court. The appeal court held that Gelerman’s expectation of having a 2-year tenure on the Board should be viewed objectively and that Gelerman’s subjective belief based on the APA was not reasonable. Gelerman knew or should have known that he might not have the support of Royer, Baylin’s Chairman and the sole Director of its largest shareholder. The only undertaking that Baylin made in the Agreement was to act honestly and in good faith to help Gelerman secure the necessary votes; there was no promise of being re-elected or that the existing shareholders would support him. Such an agreement could have been negotiated and secured. The Court of Appeal held that it is “difficult for a party to have reasonable expectations of a particular result when that result is above and beyond what the parties negotiated” (para. 51). Royer did not support the way that Gelerman acted as a director, and thus he had an obligation to act in Baylin’s best interest and in the interest of its largest shareholder.
Ultimately, the appeal judge held that the application judge’s misunderstanding of the TSX policy and Baylin policy on majority voting, coupled with the palpable and overriding error of relying on subjective expectations as opposed to objective expectations, led the application judge to find that there was oppressive conduct on behalf of Baylin towards Gelerman. For these reasons, the decision was overturned and new orders were granted.
Baylin serves as a reminder that a corporation’s majority voting policy should be drafted in observance of the TSX’s policy guidelines, but also that the latter guidelines are not as rigid or inflexible as they may appear. Baylin was able to draft a policy that differed from examples given by the TSX policy yet it remained compliant and valid in the eyes of the Court of Appeal. Baylin should also serve as a reminder that the reasonable expectations that form the basis of an oppression remedy must be objectively reasonable and not something that the party had failed to bargain for.
