Ontario SCJ Dismisses Proxy Solicitation Application

On July 27, 2009, Justice Herman J. Wilton-Siegel of the Ontario Superior Court of Justice (Commercial List) dismissed the application of JLL Patheon Holdings LLC, JLL Patheon Holdings II, LLC and JLL Partners Fund V, L.P. (together, JLL) to set aside the election of the board of directors of the respondent, Patheon Inc. Justice Wilton-Siegel issued his reasons for decision on August 20, 2009.

On April 29, 2009, Patheon Inc. held its annual general meeting of shareholders. During this meeting, two individuals (G. Wesley Voorheis and Roy T. Graydon) were elected from the floor to replace two of the directors of Patheon who had been recommended for election in Patheon's management proxy circular.

JLL subsequently commenced an application in the Ontario Superior Court of Justice (Commercial List) seeking an order declaring that the result of the election of the board of directors at the AGM should be declared a nullity and that a new election of directors should be held. JLL is a shareholder of Patheon and has three nominee directors on the company's nine-person board of directors. At the time of the AGM, JLL had outstanding an unsolicited insider bid for any and all shares of Patheon.

The application raised a number of issues of first impression for the court. First, this is the first decision in Canada to consider the term “acquiescence” in the proxy solicitation provisions of the Canada Business Corporations Act as well as the nature and scope of permissible conduct a special committee can engage in when faced with a contested election of directors without contravening those provisions. In this respect, JLL argued that the special committee of Patheon, which was formed in response to its unsolicited insider bid, had solicited proxies “by or on behalf of management of the corporation” in favour of Voorheis and Graydon by, among other things, interacting with Voorheis in the period before he was elected. In rejecting this position, Justice Wilton-Siegel considered the meaning of “acquiescence” in the definition of solicitation “by or on behalf of management.” He held that “acquiescence” includes an element of control. It requires more than “mere knowledge of a proxy solicitation by others without the ability to prevent the proxy solicitation.”

Second, this is also the first decision to consider in any detail the so-called 15-shareholder exemption contained in the proxy solicitation provisions. In this regard, JLL alleged that Voorheis and a partner in his law firm, Michael Woollcombe, had contravened the proxy solicitation provisions of the CBCA by soliciting more than 15 shareholders without issuing a dissident proxy circular. In rejecting JLL's position, Justice Wilton-Siegel held that the term “shareholder,” as used in these provisions, means the party having decision-making authority concerning the voting of the shares in question, rather than the registered holder of the shares or other market participants.

Davies Ward Phillips & Vineberg LLP represented the special committee of Patheon with a team that included Kent E. Thomson, Luis Sarabia, James Bunting and Sean Campbell (litigation) and William Gula, Patrick Moyer and Philippe C. Rousseau (corporate).

Stikeman Elliott LLP represented JLL with a team that included Eliot Kolers, Danielle Royal and Ellen Snow (litigation) and Ron Ferguson and David Weinberger (corporate).

ThorntonGroutFinnigan LLP represented Voorheis and Woollcombe with a team that included John Finnigan and Megan Keenberg.

Osler, Hoskin & Harcourt LLP represented Patheon Inc. with a team that included Mark Gelowitz, Allan Coleman and Lauren Tomasich (litigation) and Donald Ross and Andrew MacDougall (corporate).