Pala Investments Holdings Limited v. Bristow

2009 BCSC 680 Pala Investments Holdings Limited v. Bristow

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Pala Investments Holdings Limited v. Bristow, 2009 BCSC 680 Date: 20090605 Docket: S093956 Registry: Vancouver Between: Pala Investments Holdings Limited Petitioner And John Bristow, Mark Bristow, Dave Copeland and Rockwell Diamonds Inc. Respondents Before: The Honourable Mr. Justice Pitfield Oral Reasons for Judgment Counsel for the Petitioner: D.R. Brown J. McLean Counsel for the Respondents, John Bristow, Mark Bristow and Dave Copeland M. Tourigny C. Bowman Place and Date of Hearing: Vancouver, B.C. June 3, 4, 2009 [1] This petition arises as a result of a proxy battle between Pala Investments Holdings Ltd. ("Pala") and the individuals John Bristow, Mark Bristow and Dave Copeland (the "Copeland Group"), in relation to the governance of Rockwell Diamonds Inc. ("Rockwell"). [2] Rockwell is incorporated under the Business Corporations Act, S.B.C. 2002, c. 57 ("BCA"). It carries on business as a diamond mining company in South Africa. At present, its board of directors is comprised of seven individuals: John Bristow, Mark Bristow, Dave Copeland, Sandile Zungu, William Fisher, Terence Janes and Gregory Radke. [3] At bottom, the dispute between Pala and the Copeland Group centres on control of Rockwell. Pala, which owns approximately 19.94% of Rockwell's issued share capital, wishes to remove all of the directors from office and

to re-elect the Pala slate. The slate includes four of the current directors and three new individuals, but excludes the Copeland Group. Pala would also like to terminate a Shareholder Rights Plan (the "SRP") which purports to confer certain rights upon shareholders. The Copeland Group opposes the Pala plan to reconstitute the board, and favours continuation of the SRP. [4] On March 23, 2009, in pursuit of its objectives, Pala and other shareholders sufficient to represent at least 20% of the outstanding Rockwell common shares as required by s. 167 of the BCA, requested the Rockwell board to convene a shareholder's meeting for the purpose of removing the current directors, electing new directors, and amending and then terminating the SRP. [5] Rockwell did not respond to the request and did not send a notice of general meeting to shareholders within 21 days of receipt of the Pala request. As a result, on April 29, 2009, some 15 days following the expiry of the 21-day window, Pala exercised the right conferred by s. 167(8) and announced that it was calling a special and general meeting of shareholders to be held June 17, 2009. [6] On May 5, 2009, Pala issued another press release identifying its nominees for election to the Rockwell board. On May 20, 2009, Pala filed and mailed to all shareholders a notice of meeting and proxy circular. The notice of meeting included in the

material described the business to be transacted at the meeting in the following terms: 1. To consider and, if deemed advisable, to pass the following special resolution to remove each of the directors of the Company pursuant to section 128(3)(a) of the British Columbia Business Corporations Act (the "Act") and section 14.10 of the Articles of the Company, namely; Resolved, as a special resolution of the Company, that each of the directors of the Company be and is hereby removed as a director of the Company; 2. To elect directors of the Company pursuant to section 131(a)(i) of the Act and section 14.10 of the Articles of the Company; 3. To amend the Company's Shareholder Rights Plan Agreement for the purposes of terminating it; and 4. To transact such further and other business as may properly come before the Meeting or any adjournment or postponement thereof. [7] The Pala proxy form which had been mailed to shareholders asked those who were unable to attend the meeting to vote as follows: 1. To vote FOR or AGAINST the removal of the current Board of Directors of the Company; 2. To vote FOR or WITHHOLD from voting on the following slate of director nominees: William Fisher, Terence Janes, Gregory Radke, Phillip Reynolds, Hennie Van Wyk, Marthinus von Wielligh and Sandile Zungu; and 3. To vote FOR or AGAINST the ordinary resolution of the shareholders to amend and then terminate

the Company's Shareholder Rights Plan Agreement. [8] Note 2 to the proxy provided as follows: (2) This form of proxy confers authority on the above-named person to vote in his or her discretion in respect of amendments to the matters identified in the notice of meeting accompanying this form of proxy or in respect of other matters that may properly be brought before the Meeting. [9] At the time Pala initiated the process, it controlled the Rockwell board. However, the Copeland directors were opposed to the company convening a meeting in response to the Pala request. It appears that negotiations ensued between the Copeland Group and the other directors and, on May 18, 2009, the board resolved as follows: Resolved: The [Copeland Group's] costs in connection with the preparation, mailing and solicitation of votes in connection with the [Copeland Group's] Circular recommending against the [Pala] proposals and setting forth the [Copeland Group's] ideas for an alternative financing strategy (the "[Copeland Group's] Expenses") be acknowledged by the Board to be costs "in and about the business of the Company" provided that the [Copeland Group's] Expenses do not exceed CAD$225,000 and provided further that such [Copeland Group's] Expenses be itemized in invoices to be sent to the full Board for its consideration and approval; [10] Purportedly in reliance upon that resolution, the

Copeland Group who described themselves as the Executive Directors of Rockwell, filed a competing proxy circular which was mailed to shareholders on May 21, 2009. Included with the circular was a form of proxy inviting shareholders to appoint a proxy to vote in respect of the following matters: 1. Removal of Directors FOR AGAINST To remove from office, by special resolution, one of more directors of Rockwell Diamonds Inc.

2. Shareholder Rights Plan FOR AGAINST To continue the Shareholder Rights Plan.

3. Fair Rights Offering FOR AGAINST To authorize and direct the Company to conduct a fair rights offering which does not require amendment or termination of the Shareholder Rights Plan on the terms set out in the information circular prepared by the [Copeland Group].

4. Denial of [Pala] Costs FOR AGAINST To direct Rockwell Diamonds Inc. to not reimburse [Pala] for its costs in connection with the Meeting. [11] The proxy included the following notices: This proxy confers discretionary authority in respect of amendments or variations to matters identified in the Notice of Meeting or other matters that may properly come before the meeting or any adjournment or postponement thereof. Time is of the essence - please vote only your green proxy today. [12] The filing and mailing of the Copeland Group's proxy circular and form of proxy prompted Pala to file the petition now before the court seeking orders that: THIS COURT ORDERS THAT: 1. The Special and General Meeting of the Shareholders of Rockwell Diamonds Inc. ("Rockwell" or the "Company") to be held on June 17, 2009 (the "Meeting") be conducted without regard to any shareholder proxies presented in the form of the green proxy solicited by John Bristow, Mark Bristow and David Copeland by circular dated May 20, 2009 (the "Green Proxy"); 2. The only business to be addressed or transacted at the Meeting will be: (a) To pass the following special resolution to remove each of the directors of the Company pursuant to section 128(3)(a) of the British Columbia Business Corporations Act (the "Act") and section 14.10 of the Articles of Rockwell, namely: Resolved, as a special resolution of the Company,

that each of the directors of the Company be and is hereby removed as a Director of the Company. (b) To elect directors of the Company pursuant to section 131(a)(i) of the Act and section 14.10 of the Articles of the Company; (c) To amend and then terminate the Company's Shareholder Rights Plan Agreement; (d) To determine whether the Company should refuse to reimburse the requisitioning shareholder for the expenses actually and reasonably incurred by it in requisitioning, calling and holding the Meeting as contemplated by section 167(1) of the Act; and (e) To address any incidental matters that arise in the course of transacting the business identified in (a) to (d). (the "Business") 3. Any further solicitation of proxies, including any Circular to be delivered to Rockwell shareholders, shall not purport to raise or propose any additional matters not included in the Business.

4. Subject to paragraph 5 of this Order, any further proxy solicitations shall employ a form of proxy phrased in such a way that it seeks voting instructions with respect to three and only three matters as follows: (a) To vote for or against the removal of the current Board of Directors of the Company; (b) To vote for or withhold from voting on the following slate of director nominees: William Fisher, Terence Janes, Gregory Radke, Philip Reynolds, Hennie Van Wyk, Marthinus von Wielligh and Sandile Zungu; and (c) To vote for or against the ordinary resolution of the shareholders to amend and then terminate the Company Shareholder Rights Plan Agreement.

5. Provided that any form of proxy employed in connection with further proxy solicitations may also seek voting instructions with respect to the question of whether the Company should refuse to reimburse the requisitioning shareholder for the expenses actually and reasonably incurred by it in requisitioning, calling and holding the Meeting as contemplated by section 167(1) of the Act. [13] Pala claims that the Copeland Group has not followed the procedure authorized or contemplated by the BCA or the Rockwell articles which would permit the question of a fair rights offering to be considered by the meeting, and says that the Copeland Group lacks the authority to circulate the form of proxy they have compiled with the result that any such proxies should be excluded from consideration at the meeting on June 17, 2009. [14] The Copeland Group says that it is entitled to use the form of proxy it employed; to use the form of proxy to give notice that an additional matter, the topic of a rights offering, will be placed before the meeting; and to use the proxy to solicit votes from shareholders on the question of a rights offering. In the alternative, the Copeland Group says that if it cannot proceed as it has, then I should give effect to their form of proxy, in the event that form is used by any shareholder, by providing directions regarding the manner in which the Copeland Group

proxy should be construed. The Copeland Group contends that if that is not done, those shareholders who rely on and submit that form of proxy will be disenfranchised at the June 17, 2009 meeting. [15] In substance, this petition is concerned with the question of the manner in which shareholders may bring matters before meetings of shareholders, the nature of the responses that other shareholders may make to such an initiative, the appropriate formulation and use of proxies, and the nature and extent of the court's authority to reject improperly formulated proxies, or to constrain their use. [16] Provided a company's memorandum and articles are not inconsistent with the BCA or a regulation, the memorandum and articles will govern the conduct of a general meeting of shareholders: BCA, s.

181. The relevant provisions of the BCA and the Rockwell articles are set forth in Appendix "A" to these reasons. [17] Rockwell's articles state that shareholders must be provided with 21 days' notice of the business to be transacted at a general meeting in a notice of meeting: Art. 10.8. [18] It is beyond dispute that the articles contemplate that the company shall give notice of a meeting of shareholders and the notice shall describe the business that is to be transacted at the meeting. In most circumstances, the board will decide upon the topics to be addressed at a meeting. That said, a shareholder may ask the board to include a topic of discussion or a resolution in a notice of meeting. The board may act on or decline the request. [19] In the event the board declines the request, then the shareholder has two available courses of action. The first is to await the meeting and to ask that the topic or resolution be added to the agenda, or considered as new business. The second is to obtain the support of the holders of not less than 5% of the issued shares and to request a meeting to consider the specified topic or resolution: BCA, s. 167(2). In the event the board declines to convene a meeting in response to the request, the requesting shareholders are at liberty to circulate their own notice of meeting: BCA, s. 167(8). The requesting shareholders may solicit proxies

provided, in the case of a reporting company, they do so by way of a proxy information circular. [20] Any shareholder who is opposed to the resolution or resolutions proposed by the requesting shareholders is likewise able to solicit proxies in opposition to the resolutions of which notice has been given. Unless an opposing shareholder has resorted to the procedure contemplated by s. 167 of the BCA, that shareholder will not be able to give notice requiring another topic or resolution to be placed before, and considered by, the meeting. That result flows from the fact that the shareholder has no individual capacity under the articles to issue a notice of meeting. Instead, in the course of soliciting a proxy, the soliciting shareholder may, and ordinarily does, specify that the proxy holder will be permitted to exercise the proxy to vote on any other matter that properly comes before the meeting. That right extends to items added to the agenda or considered as new business at the meeting. Both forms of proxy circulation in this instance conferred that right on the proxy holder. [21] The proper course, then, is for any shareholder who wishes a matter to be considered by the meeting when notice of the question has not been included in a notice of meeting to ask at the meeting that the agenda be amended, or that the new matter be considered as new business. Upon such a request

being made, the chair may decide whether the matter can properly be brought before the meeting having regard for the substance and complexity of the matter, the extent of prior consideration by the board with a view to making a recommendation to the meeting, the perceived importance of the question, and any other factor which the chair of the meeting considers relevant. The proxy holder may vote as it chooses in relation to such questions if, as, and when they come before the meeting. [22] With respect, that is not the course followed by the Copeland Group, and the course it did pursue is deficient. [23] Pala followed the procedure set forth in s. 167 of the BCA. It asked shareholders to provide proxies in respect of specific resolutions as I have previously remarked. One of the notes attached to the form of proxy stated that the proxy holder would be entitled to vote, in its discretion, in respect of any other matter that properly came before the meeting. [24] It was open to the Copeland Group to solicit proxies in opposition to the resolutions proposed by Pala. For the reasons I have stated, it was not open to the Copeland Group to propose resolutions that were not contained in the notice of meeting circulated by the Pala Group. There was nothing to prevent the use of a different colour or form of proxy, provided that what was sought was a yes or no, or for or against, answer

to the specific resolutions of which Pala had given notice. Likewise, there was nothing to prevent the Copeland Group from stipulating that the grant of proxy would entitle the proxy holder to vote, in its discretion, on any other business that came before the meeting. Indeed, the Copeland Group proxy form stipulated that would be done. [25] Instead of proceeding in that manner, the Copeland Group proxy restated questions 1 and 3 from the Pala proxy, added a new form of resolution in respect of which a for or against vote was requested, and added a new item, namely a resolution which, if carried, would deny Pala recovery of its expenses in calling and convening the general meeting of shareholders. [26] The Copeland Group's proxy should have repeated the first resolution as it had been stated in the Pala notice of meeting, and should have repeated the third resolution dealing with the amendment and termination of the SRP as it had been stated in the Pala notice of meeting. It should not have asked for votes on any other matter. Notice of intention to ask the chair to allow consideration of a resolution to deal with expenses should have been expressed in the proxy circular, as should notice of intention to ask the chair to entertain an advisory resolution in relation to the pursuit of a rights offering. [27] In sum, the Copeland Group's proxy was improperly formulated and, on a

principled basis, it should not be recognized as valid. However, I am persuaded that I should exercise the discretion conferred by s. 186 of the BCA to provide directions regarding the use that may be made of any proxy tendered on the Copeland Group's form. In that way, no shareholder will be inappropriately disenfranchised. [28] I am satisfied that the first and second questions are sufficiently clear to permit them to be regarded as votes for or against the first and third resolutions proposed by the Pala Group. The issue of a rights offering has not been properly placed before the meeting by notice of meeting in the manner contemplated by the Rockwell articles. It will be up to the chair of the meeting to consider whether any discussion of, or resolution pertaining to, a rights offering should be permitted at the meeting. Likewise, it will be for the chair of the meeting to decide whether the question of the reimbursement of expenses incurred by Pala in relation to the convening of the meeting should be considered by the meeting. [29] In the event that either or both of the rights offering and reimbursement issues is permitted to come before the meeting, the holder of a proxy, whether granted on the Pala or Copeland Group form, will be entitled to vote on those issues as they consider appropriate as each form of proxy indicated would be the case. [30] It follows that: a. The

application for the relief specified in paras. 1 through 5 of the draft form of order tendered by Pala is dismissed. b. Responses to the first question in the Copeland Group's proxy shall be regarded as a vote for or against, as the case may be, the Pala resolution proposing that all directors be removed from office. c. Responses to the second question in the Copeland Group's proxy shall be regarded as a vote for or against, as the case may be, the Pala resolution proposing an amendment to, and termination of, the Shareholder Rights Plan. d. The Copeland Group's form of proxy shall not be valid for any other purpose, provided, however, the person in whose favour a Copeland Group proxy has been granted may vote, in his, her, or its discretion, on the question of a rights offering or reimbursement to Pala of its expenses in the event that either or both of such issues come before the meeting following upon a request to the chair of the meeting. [31] The parties may speak to other terms of the order. Rockwell is directed to ensure that the form of order as finalized is posted on SEDAR (System for Electronic Document Analysis and Retrieval). Rockwell shall issue a press release not later than Tuesday, June 9, 2009, stating only that the court has granted an order in response to the petition, and the order may be viewed on the SEDAR website, and access to the site and the order may

be gained in the manner described in the press release. "Mr. Justice Pitfield" Appendix "A" Excerpts Business Corporations Act Requisitions for general meetings 167(1) Shareholders referred to in subsection (2) may requisition a general meeting for the purpose of transacting any business that may be transacted at a general meeting. (2) A requisition under this section may be made by shareholders who, at the date on which the requisition is received by the company, hold in the aggregate at least 1/20 of the issued shares of the company that carry the right to vote at general meetings. (3) A requisition under this section (a) must, in 1 000 words or less, state the business to be transacted at the meeting, including any special resolution or exceptional resolution to be submitted to the meeting, (b) must be signed by, and include the names and mailing addresses of, all of the requisitioning shareholders, (c) may be made in a single record or may consist of several records, in similar form and content, each of which is signed by one or more of the requisitioning shareholders, and (d) must be delivered to the delivery address of, or mailed by registered mail to the mailing address of, the registered office of the company. (4) If a requisition under this section consists of more than one record, the requisition is received by the company on the first date by which the company has

received requisition records that comply with subsection (3) from shareholders who, in the aggregate, hold at least the number of shares necessary to qualify under subsection (2). (5) On receiving a requisition that complies with subsections (2) and (3), the directors must, regardless of the memorandum or articles, call a general meeting to be held not more than 4 months after the date on which the requisition is received by the company to transact the business stated in the requisition and must, subject to subsection (7), (a) send notice of the date, time and location of that meeting at least the prescribed number of days, but not more than 4 months, before the meeting (i) to each shareholder entitled to attend the meeting, and (ii) to each director, and (b) send, in accordance with subsection (6), to the persons entitled to notice of the meeting, the text of the requisition referred to in subsection (3) (a). (6) The text referred to in subsection (5) (b) must be sent (a) in, or within the time set for the sending of, the notice of the requisitioned meeting, or (b) in the company's information circular or equivalent, if any, sent in respect of the requisitioned meeting. (7) The directors need not comply with subsection (5) if (a) the directors have called a general meeting to be held after the date on which the requisition is received by the company and have sent notice of

that meeting in accordance with section 169, (b) substantially the same business was submitted to shareholders to be transacted at a general meeting that was held not more than the prescribed period before the receipt of the requisition, and any resolution to transact that business at that earlier meeting did not receive the prescribed amount of support, (c) it clearly appears that the business stated in the requisition does not relate in a significant way to the business or affairs of the company, (d) it clearly appears that the primary purpose for the requisition is (i) securing publicity, or (ii) enforcing a personal claim or redressing a personal grievance against the company or any of its directors, officers or security holders, (e) the business stated in the requisition has already been substantially implemented, (f) the business stated in the requisition, if implemented, would cause the company to commit an offence, or (g) the requisition deals with matters beyond the company's power to implement. (8) If the directors do not, within 21 days after the date on which the requisition is received by the company, send notice of a general meeting in accordance with subsection (5) of this section, the requisitioning shareholders, or any one or more of them holding, in the aggregate, more than 1/40 of the issued shares of the company that carry the right to vote at general

meetings, may send notice of a general meeting to be held to transact the business stated in the requisition. (9) A general meeting called, under subsection (8), by the requisitioning shareholders must (a) be called in accordance with subsection (5), (b) be held within 4 months after the date on which the requisition is received by the company, and (c) as nearly as possible, be conducted in the same manner as a general meeting called by the directors. (10) Unless the shareholders resolve otherwise by an ordinary resolution at the general meeting called, under subsection (8), by the requisitioning shareholders, the company must reimburse the requisitioning shareholders for the expenses actually and reasonably incurred by them in requisitioning, calling and holding that meeting. Rules applicable to general meetings apply to other shareholders' meetings 181 To the extent that this Act or the regulations or the memorandum or articles of a company do not make provision for any particular meeting of shareholders, the provisions of this Act, the regulations, the memorandum and the articles relating to the call, holding and conduct of general meetings apply, with the necessary changes and so far as they are applicable, to that meeting of shareholders. ... Powers of court 186 (1) The court may, on its own motion or on the application of the company, the application of a director or the

application of a shareholder entitled to vote at the meeting, (a) order that a meeting of shareholders be called, held and conducted in the manner the court considers appropriate, and (b) give directions it considers necessary as to the call, holding and conduct of the meeting. (2) The court may make an order under subsection (1) (a) if it is impracticable for any reason for the company to call or conduct a meeting of shareholders in the manner required under this Act, the memorandum or the articles, (b) if the company fails to hold a meeting of shareholders in accordance with this Act or the regulations or its memorandum or articles, or (c) for any other reason the court considers appropriate. (3) Without limiting subsection (1), the court may order that the quorum or notice required by the memorandum or articles or this Act or the regulations be varied or dispensed with in respect of a meeting. Articles: Rockwell Diamonds Inc. Notice of Special Business at Meetings of Shareholders 10.8 If a meeting of shareholders is to consider special business within the meaning of §11.1, the notice of meeting must: (a) state the general nature of the special business; and (b) if the special business includes considering, approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached to it a copy of the document or state that

a copy of the document will be available for inspection by shareholders: (i) at the Company's records office, or at such other reasonably accessible location in British Columbia as is specified in the notice; and (ii) during statutory business hours on any one or more specified days before the day set for the holding of the meeting. Special Business 11.1 At a meeting of shareholders, the following business is special business: (a) at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting: (b) at an annual general meeting, all business is special business except for the following: (i) business relating to the conduct of or voting at the meeting; (ii) consideration of any financial statements of the Company presented to the meeting; (iii) consideration of any reports of the directors or auditor; (iv) the setting or changing of the number of directors; (v) the election or appointment of directors; (vi) the appointment of an auditor; (vii) the setting of the remuneration of an auditor; (viii) business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution; (ix) any other business which under the Articles or the Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.