TSX TIMELY DISCLOSURE REQUIREMENTS: A
REFRESHER AND BEST PRACTICES
October 2012
Number 218
— Amandeep Sandhu, McMillan LLP. © McMillan LLP 2012. Reproduced with permission.
This article provides a brief summary of the Toronto Stock Exchange (TSX) timely
disclosure requirements and discusses (i) the circumstances in which an issuer may delay
the disclosure of confidential information, (ii) market surveillance pre-notification
procedures, and (iii) issues relating to the timing of board meetings and the disclosure of
material information.
In the News
Ontario’s
Not-For-Profit
Corporations Act
Delayed Further . . . .
3
Legislative Update
4
Recent Cases . . . . . .
Requisition Put
Forward by
Shareholder Group
for Meeting Not in
Compliance with
Statute or Articles . .
Directors of Board
of Non-Share
Capital Corporation
Resigning But Not
Permitted To
Revoke Resignation
Without Board
Approval . . . . . . . . . . . .
No Basis for
Derivative Action
Where Loan
Repayment to
Company Alleged
To Be Sham
Directed by
Majority
Shareholder . . . . . . . . .
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Background
The TSX’s timely disclosure requirements are based on the concept of “material
information”, which is comprised of the concepts of “material fact” and “material
change”. These latter two are distinct concepts that are defined in provincial securities
legislation. Generally, they refer to either (i) a fact, or (ii) a change in the business,
operations or capital of an issuer that in each case, if disclosed, would reasonably be
expected to have a significant effect on the market price or value of an issuer’s securities.
Provincial securities legislation requires immediate disclosure of a material change. The
TSX’s timely disclosure rules require immediate disclosure of material information.
What If the Material Information Is Confidential?
In limited circumstances, provincial securities legislation permits issuers to file material
change reports on a confidential basis. The TSX’s timely disclosure rules permit issuers to
keep material information confidential on a temporary basis. In each case, the issuer
must believe that disclosure would be unduly detrimental to its interests.
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The TSX, for the purposes of its timely disclosure rules, has outlined examples of
instances in which disclosure might be unduly detrimental, including where disclosure of
information
(1) would prejudice an issuer’s ability to pursue specific and limited objectives or to
complete a transaction or series of transactions that are under way,
(2) would put the issuer at a significant competitive disadvantage, or
(3) concerning the status of ongoing negotiations would prejudice the successful
completion of those negotiations.
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The TSX states that the withholding of information based on the above standard must be
infrequent and can only be justified where the potential harm to the issuer or investors
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caused by immediate disclosure may reasonably be considered to outweigh the undesirable consequences of delaying
disclosure.
The TSX discourages delaying disclosure for a lengthy period of time, as the preservation of confidentiality becomes
more difficult over time. Where an issuer chooses to delay disclosure of confidential information, the issuer should take
precautions to reduce the risk of premature disclosure of the information. Such precautions would include, among other
things, limiting the number of people within and outside of the organization to whom the information is disclosed, and
monitoring movements in the issuer’s stock.
The material fact and material change analysis often arises in regards to the existence of negotiations related to a sale
or acquisition transaction. The existence of such negotiations is likely a material fact, but as outlined above, TSX rules
permit issuers to keep such material information confidential in certain circumstances. In regards to provincial securities
legislation, a review of relevant regulatory decisions suggests that the existence of negotiations related to a sale or
acquisition transaction would likely not rise to the level of a material change until all proposed parties are firmly
committed. We expect that this “firm commitment” would generally occur once all proposed parties have received the
required board approvals and definitive agreements have been executed; however, this determination would ultimately
need to be made on a case by case basis.
When Do Issuers Need To Pre-Notify IIROC?
The Investment Industry Regulatory Organization of Canada (IIROC) is responsible for the market surveillance function
in Canada. Among other things, IIROC monitors listed issuers’ timely disclosure of material information. IIROC reviews
news releases disclosing material information before such releases are disseminated to the public. Both the TSX and
TSX Venture Exchange have retained IIROC to act as their regulation service provider. The TSX requires issuers to send
a copy of all news releases to IIROC.
News Releases Disclosing Material Information
While the TSX requires that material information be disseminated immediately, the procedure for notifying IIROC of
the dissemination of material information varies depending on the time of day at which the dissemination is to take
place.
If material information is to be disseminated between 8 a.m. Eastern time and 5 p.m. Eastern time, the issuer must
pre-file the news release with IIROC and obtain IIROC’s sign off before disseminating the news release to the public.
IIROC will then be in a position to determine whether a trading halt should be imposed.
If material information is to be disseminated before 8 a.m. Eastern time or after 5 p.m. Eastern time, the issuer should
send a copy of the news release to IIROC at the same time as it disseminates the news release to the public. Issuers
may also wish to call IIROC and leave a voicemail to alert IIROC that the issuer has disseminated a news release
disclosing material information.
Any news release disclosing material information must be disseminated through a newswire service approved by the
TSX.
News Releases Relating to Non-Material Information Only
An issuer disseminating a news release that discloses non-material information only should send a copy of the news
release to IIROC at the same time as it disseminates the news release to the public. This procedure applies no matter
what time of day the news release is to be disseminated.
However, as a practical matter, issuers are encouraged to take a conservative approach when assessing whether a news
release contains material information, as the threshold for information that may potentially be “market moving” is
quite low, particularly for smaller issuers. As a result, issuers may wish to pre-clear news releases with IIROC in all
except the most obvious cases.
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Timing of Board Meetings and the Disclosure of Material Information
The TSX’s timely disclosure rules require immediate disclosure of material information. Where a decision made at a
meeting of an issuer’s board of directors constitutes material information, and where such meeting takes place
between 8 a.m. Eastern time and 5 p.m. Eastern time (which are considered to be market hours), the issuer is required
to immediately notify IIROC of the material information before it is disseminated to the public, notwithstanding the
fact that the board meeting is continuing.
While it may appear reasonable to wait for the board meeting to conclude before notifying IIROC, the TSX has stated
that immediate notification to IIROC by telephone is desirable in such circumstances. In these circumstances the issuer
would likely be required to initially notify IIROC of the material information orally by telephone, and then contact
IIROC again once the news release disclosing the material information has been prepared.
Where possible, it may be preferable for issuers to schedule board meetings either before 8 a.m. Eastern time or after
5 p.m. Eastern time, as during such times (which are considered to be outside of market hours) issuers are not required
to pre-notify IIROC of the dissemination of material information to the public.
However, where a board meeting takes place during market hours and a decision is expected to be made at the board
meeting, it would be prudent to have a draft news release prepared in advance. If the expected decision is reached, the
news release can be reviewed and approved by the board and sent to IIROC immediately for pre-clearance, even while
the board meeting continues.
IN THE NEWS
Ontario Legislature Prorogued
Ontario Premier Dalton McGuinty’s prorogation of the Ontario Legislature on October 15, in tandem with his
resignation from office, came as quite a surprise to Queen’s Park watchers and regular citizens alike. With this abrupt
end to the legislative session and halting of business, the embattled government can take a breather while all bills on
the order table are immediately thrown out. This effectively kills a number of high-profile proceedings and legislative
initiatives that were in the works; for example:
●
hearings into the election-time decision making behind gas-plant cancellations;
●
the merger of the Independent Electricity System Operator and Ontario Power Authority; and
●
planned rebates for the HST in certain home heating costs.
In all, 109 of the 132 bills that were tabled during the 40th legislative assembly have been wiped clean, with the
remainder having either received royal assent in time or been lost at reading. The dead bills may be brought back for
reintroduction once the legislature is recalled, but with a tenuous minority government at the helm and another
election looming, it is quite possible that we have seen the last of much of the work of the 40th legislative assembly.
Ontario’s Not-For-Profit Corporations Act, 2010 Delayed Further
Meanwhile, the Ontario government also recently announced that the proclamation and coming into force of the
long-awaited Not-For-Profit Corporations Act, 2010 (the “Act”) will be delayed from the original target date of
January 1, 2013, to July 1, 2013. It appears that more time is required to finalize the tools that will be made available
to assist not-for-profit corporations with the transition to the new legislation, along with other preparations for
implementation. Some stakeholders had felt that the January 1 implementation date was too rushed, as a number of
transition matters still needed sorting out. The Act received royal assent on October 25, 2010.
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LEGISLATIVE UPDATE
Saskatchewan
The Business Corporations Act (the “Act”) was amended by SS 2012, c. F-13.5, s. 47, in force October 1, 2012. This
changes the Act to include mention of the Financial and Consumer Affairs Authority of Saskatchewan, which is
established by the amendment.
RECENT CASES
Application To Continue Derivative Action Allowed Where Applicant
Acting in Good Faith and Proposed Claim Not Bound To Fail
Supreme Court of British Columbia, September 10, 2012
A.R. Thomson Ltd. (the “company”) was a family business which manufactured and distributed products for use in
industrial settings. The company was founded and operated by Allan Thomson. In 1974, Gordon Taylor (“Taylor”) began
working for the company and in 1987, married Lisa Thomson (“Lisa”), the daughter of Allan Thomson. In 1997, the
company was restructured as a partnership, A.R. Thomson Group (“ARTG”), and shares in the company founded by
Allan Thomson were exchanged for partnership interests. One of the six partners who signed the partnership agreement
was 550934 British Columbia Ltd. (“550934”), a company which was owned equally by Taylor and his wife, Lisa. Taylor,
Lisa, and Lisa’s brother Jim Thomson were the directors of 550934. The other partners were holding companies owned
by Lisa’s four siblings and A.R. Thomson Ltd., which was the managing partner.
Taylor and Lisa separated in 2005 and, while Taylor continued to work for ARTG, the situation became increasingly
difficult as Taylor felt that ongoing family law proceedings affected his professional relationship with Allan Thomson. In
2006, Taylor decided to leave ARTG, and in November 2007, he incorporated a new company.
About two years later a notice of default was sent to 550934 by ARTG, stating that 550934 was in breach of the
restrictive covenant in the partnership agreement, because it had permitted Taylor to have a financial interest in a
competing company, during the course of which he had made use of ARTG’s confidential information. Taylor did not
withdraw from his activities with the new company and, in February 2010, the other partners of ARTG passed a
resolution requiring 550934 to withdraw from the partnership. Taylor subsequently, without a resolution of 550934 or
leave of the court, brought an action on behalf of 550934 against ARTG and Lisa, alleging breach of the partnership
agreement and breach of the fiduciary duty of partners. The courts initially held that Taylor had the authority to bring
such an action unilaterally, but provided for a stay pending Taylor’s application for leave to bring a derivative action.
Following several amendments of his Statement of Claim, Taylor applied to the Court for leave to continue his action.
The application was allowed. The Court began by noting that section 232 of the British Columbia Business Corporations
Act permits a shareholder or director of a company to apply to the court for leave to prosecute a legal proceeding in
the company’s name. Before such leave can be granted, the Court must be satisfied that the complainant has made
reasonable efforts to cause the directors of the company to bring such proceedings, that he or she has given notice to
those directors of the application for leave to bring the proceedings, that the applicant is acting in good faith, and that
the proposed action is in the best interests of the company. On the facts before it, the Court was satisfied that it was
only the “good faith” and “best interests” requirements that were in issue. The Court addressed each of those
requirements in turn, in light of those facts.
On the issue of the good faith requirement, the Court held that the test asks whether the action had been brought
primarily for the purpose of pursing a claim on the company’s behalf. In making that determination, the Court must
consider the applicant’s belief in the merits of the proposed action, any other existing disputes between the parties,
and any alleged ulterior motives. The inquiry is a question of fact in which the burden of establishing good faith lies
with the applicant. However, the fact that an applicant may benefit from a successful derivative action does not
indicate that the application was brought in bad faith. The Court reviewed the history between the parties, including
the marital dispute between Taylor and Lisa. It concluded that, not withstanding the allegations that the application for
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a derivative action had been brought in order to gain a tactical advantage in the ongoing family law dispute, there was
no evidence to support such a conclusion. While it was open to a trial judge to reach different conclusions about the
motivation for Taylor’s application, the Court held that the evidence, as a whole, established that Taylor had made the
application in good faith.
The Court then turned to a consideration of whether the proposed action was in the best interests of 550934. The
“best interests” test requires a court to ask whether the proposed action “appears” to be in the best interests of the
company, and not whether such action is in fact so. It is sufficient for the applicant to show that there is an arguable
case. Taylor’s application had advanced a number of claims by 550934 against ARTG, particularly in relation to the
alleged breach of the restrictive covenant and whether such covenant was in any event enforceable. After reviewing the
terms of that restrictive covenant, the actions taken by Taylor, and evidence put forward by Allan Thomson and Lisa as
part of the family law proceedings, the Court held that Taylor’s position on both issues, while not certain, were
nonetheless not bound to fail. Consequently, Taylor had met the test of putting forward an arguable case. As Taylor
was found to be acting in good faith and had established an arguable case that the proposed action was in the
company best interests, the application was allowed.
550934 British Columbia Ltd. v. A.R. Thomson Group, 2012 ACLG ¶79,475
2012 BCLG ¶78,900
2012 CCSG ¶51,337
2012 OCLG ¶51,713
2012 CCLR ¶201,057
Requisition Put Forward by Shareholder Group for Special Shareholders’
Meeting Not in Compliance with Statute or Corporate Articles and
Meeting Could Not Be Held
Supreme Court of British Columbia, September 11, 2012
TELUS Corporation (“TELUS”) was a telecommunications company incorporated under the British Columbia Business
Corporations Act (the “Act”). The respondent, CDS Clearing and Depository Services Inc. (“CDS”), was a company which
acted as a registered shareholder on behalf of financial institutions, investors, brokers, and other entities known as
participants, which held shares either on their own behalf or on behalf of other entities. Any entity with a beneficial
interest in a share held by CDS was not registered as a shareholder by the share-issuing entity; rather, CDS remained
the beneficial shareholder.
TELUS had a dual share structure composed of voting shares and non-voting shares. That structure was created to
enable foreign entities to participate economically in TELUS without running afoul of Canada’s foreign control
restrictions with respect to telecommunications companies. The two classes of shares were identical, except with
respect to voting rights. Notwithstanding, the voting shares had historically traded at a premium of about 5% when
compared to the non-voting shares.
Foreign ownership of TELUS shares declined and the company determined that it would be advisable to consolidate its
shares by converting all non-voting shares into common voting shares, by means of a one-to-one conversion. That
proposal was opposed by a TELUS shareholder, Mason Capital Management LLC (“Mason”), which argued that any
conversion should reflect the historical premium at which the voting shares had traded. TELUS could not obtain the
requisite two-thirds support needed to approve the proposal, which involved an amendment to the corporate articles,
and so the proposal was withdrawn. TELUS then advanced a new proposal which would effect the one-to one
conversion through a Plan of Arrangement, which would require the support of only a majority of voting shareholders.
It announced a date for a shareholders’ meeting to vote on the Plan of Arrangement.
CDS issued a requisition calling for a separate meeting of TELUS shareholders to vote on four resolutions which, in
effect, were intended to prevent the one-to-one conversion by requiring a higher conversion ratio. TELUS refused to call
the general meeting requested, on the basis that the requisition was defective in several respects, and in particular that
it failed to reveal the identity of the shareholder on whose behalf CDS has issued the requisition. TELUS then
petitioned the Court for an order that would prevent the CDS meeting from taking place.
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The petition was allowed. The Court began by noting that, as a general rule, where a court is to enjoin any meeting of
shareholders, there must be a very strong case to justify such action, as a meeting of shareholders is the forum in
which members of a company can assemble to debate and resolve their differences.
TELUS had declined to call such a meeting in response to the CDS requisition on the basis that such requisition was
not properly brought. In particular, TELUS took the position that any shareholder on whose behalf such a requisition
was issued should withdraw its position in the intermediary and register its own shares directly with TELUS, in order to
take responsibility for its actions, following which the requisition could proceed. The Court agreed that the
requisitioning of a general meeting by a shareholder was an extraordinary step. It reviewed the statutory provisions
governing the requisitioning of such a meeting and concluded that the contents of a requisition, as provided for in
section 167 of the Act, must, in both form and content, be compliant with the requirements of that section.
Specifically, the requisition must be signed and must contain the names and addresses of the requisitioning
shareholders who hold in the aggregate the required number of shares. In the Court’s view, that information was to be
included for the benefit of shareholders who are entitled to vote at the general meeting and to assist the directors and
company in dealing with the requisition. The Court concluded that a requisition naming only CDS did not fulfil those
statutory requirements. Further, the directors of the company were required to call a meeting only if the requirements
of section 167 were met and, in the Court’s view, it was not possible for the directors to ascertain whether the
required threshold was met where the requisition named only CDS.
TELUS also argued that the resolutions put forward in the CDS requisition were ultra vires the company. In its view, the
resolutions sought to amend a specific article of the company and any such amendment required special separate
approval from holders of both voting and non-voting shares. The Court reviewed the content of the resolutions
contained in the CDS requisition and agreed that they did propose an amendment to the articles, which required
separate meetings. However, a requisition made under section 167, as the CDS requisition was, is for a general meeting,
not class meetings. The Court held that the resolutions put forward in the CDS requisition were not properly the
subject matter of a requisition under section 167, and were therefore ultra vires the company. An order issued providing
that the actions of CDS in relation to the requisition were not in compliance with the Act or the articles and that the
meeting called to consider the resolutions put forward in that requisition could not take place.
TELUS Corporation v. CDS Clearing and Depository Services Inc., 2012 ACLG ¶79,474
2012 BCLG ¶78,901
2012 CCSG ¶51,338
2012 OCLG ¶51,714
2012 CCLR ¶201,058
Directors of the Board of a Non-Share Capital Corporation Resigning But
Not Permitted To Revoke That Resignation Without Subsequent Board
Approval
Ontario Superior Court of Justice, September 7, 2012
The Olangi Wosho Foundation (the “Foundation”) was incorporated in Canada as a non-share capital corporation under
the Canada Corporations Act (the “CCA“). On October 4, 2011, the lawyer for the respondents Jean Venance Kabelu
and Deborah Etshoko Kabelu (the”Kabelus”), advised the Foundation by letter that the respondents had resigned from
the Board of Directors. The Foundation was requested to remove the respondents’ names from any Board-related
obligations and to advise the government and others that this had been done. Enclosed with their lawyer’s letter were
the respondents’ signed resignations as directors, dated October 4, 2011. Minutes of an extraordinary meeting of the
Board dated October 22, 2011 indicated that the respondents’ resignations as directors were accepted. However, on
December 15, 2011, the respondents’ lawyer sent a letter purporting to revoke their resignations as Board members of
the Foundation. Some of the remaining Board members and the Foundation applied for the determination of a number
of issues flowing from the respondents’ attempt to withdraw their resignations as Board members, including a
declaration that the respondents’ resignation from the Board was effective October 4, 2011, and that their purported
revocation of that resignation was invalid.
Some applications were granted and others were dismissed. There were sufficient facts before the Court to justify
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determining the issues without a trial. Also, there was no evidence to justify the respondents’ allegation that they had
resigned under duress. The CCA was silent as to when the resignation of a director of a non-share capital corporation
becomes effective. However, section 108(2) of the successor legislation, the Canada Business Corporations Act, provides
that a director’s resignation becomes effective when it is sent to the corporation, as opposed to when it is received by
the corporation, which is the situation with the corresponding provisions of the Ontario Business Corporations Act.
These provisions provide guidance in the absence of a specific term to the contrary in the bylaws of the corporation. In
Adams v. Association of Professional Engineers, a case decided under the Professional Engineers Act, the Ontario
Divisional Court held that: (a) the resignation of a director of a non-share capital corporation, to be effective, does not
have to be accepted by the corporation’s council or board unless there is a term to the contrary in the corporation’s
bylaws; and (b) such resignation cannot be withdrawn after being received by the council or board without the latter’s
consent. In the present case, in the absence of any specific provision in the Foundation’s General By-Law, the
respondents’ resignations became effective when they were irrevocably sent to the Foundation’s Board on or around
October 4, 2011, and in any event when they were accepted by the Foundation on October 22, 2011 (although they
did not have to be so accepted to be valid). But if they did have to be accepted by the Foundation’s Board, the
remaining Board members formed a quorum entitled to accept them, effective October 4, 2011. It would be
inconsistent with the scheme and objects of the CCA and of the Foundation’s General By-Law to require that the
respondents, who had resigned as directors, should have to be called back to the Board meeting of October 22, 2011
for the purpose of accepting their own resignations. In addition, allowing a director to unilaterally revoke his own
resignation which has been sent to and received by the Board would create chaos in the commercial world, particularly
since neither the CCA nor the Foundation’s General By-Law permitted that in this case.
The Court also determined that there were the five remaining directors of the Board of Directors of the Foundation
following the resignation of the Kabelus, and that they would remain in place until replacement directors were elected
at the next annual meeting of members, or other special meeting of members called to elect directors pursuant to the
General By-Law of the Foundation.
Kandolo v. Kabelu, 2012 ACLG ¶79,472
2012 BCLG ¶78,902
2012 CCSG ¶51,339
2012 OCLG ¶51,715
2012 CCLR ¶201,059
Striking Individual Defendants as Party Defendants in an Action Against
Defendants’ Corporations Not Permitted
Ontario Superior Court of Justice, September 21, 2012
The plaintiff was the principal shareholder of Die-Metric Tools Inc. (“Die-Metric”) and 2012636 Ontario Inc. (“201”). The
defendants Walter and Karen Palisca (“Walter” and “Karen”) owned and operated two closely held corporations under
the name Palcam Solutions Inc. (“Palcam”) as a single enterprise. In March 2010 the plaintiff and Walter entered into
an agreement (the “Agreement”) under which Palcam would acquire the shares of Die-Metric and 201 for $1.5 million,
with the purchase price payable out of future profits. These payments did not occur, and the plaintiff alleged that, after
the completion of the share purchase, Walter and Karen, having assumed control of Die-Metric and 201, initiated a
scheme to plunder Die-Metric’s assets under the guise of a legitimate corporate acquisition. The plaintiff therefore
terminated the Agreement and resumed control of Die-Metric and 201. Walter and Karen instituted proceedings to
enforce the Agreement, and a new agreement was reached under which Walter and Karen resumed control of
Die-Metric and 201. The plaintiff subsequently instituted proceedings against Walter, Karen, and their corporations, for
allegedly having wrongly converted Die-Metric’s and 201’s assets to their own use, which resulted in the latter
corporations being forced into bankruptcy. Walter and Karen moved for orders removing themselves and one of their
corporations as party defendants on the ground that leaving them as party defendants meant wrongfully piercing the
corporate veil.
The motions were dismissed. Piercing the corporate veil and making sole directors of corporations personally liable for
the corporation’s activities is not something which courts will automatically do. Although considerable respect is
accorded to the separate existence of a corporation as a legal person, if it is a closely held corporation with possibly
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one director/shareholder, one would naturally characterize that individual as the “operating mind” of the corporation.
Also, “oppression remedies” jurisprudence under section 248 of the Business Corporations Act demonstrates that the
corporate veil will be pierced to determine if the directors of a closely held corporation personally transfer corporate
assets to pay shareholder loans in order to defeat the interest of creditors (see Pillar Sausage and Delicatessen Ltd. v.
Cobb International Corp. (Ont. Sup. Ct.)). And in Chan v. City Commercial Realty Corp.,the Ontario Superior Court held
that personal liability may be imposed on a person who controls a company and uses it as a shield for fraudulent or
wrongful conduct. In the present case, Walter’s and Karen’s corporations were their “alter ego”. While in control of the
plaintiff’s corporations, they and their corporations ostensibly acted contrary to the vitality of the plaintiff’s
corporations. Striking Walter and Karen and their corporations as party defendants, therefore, would be unjustified.
Pohl v. Palisca, 2012 ACLG ¶79,471
2012 BCLG ¶78,903
2012 CCSG ¶51,340
2012 OCLG ¶51,716
2012 CCLR ¶201,060
No Basis for Derivative Action Where Loan Repayment to Company
Alleged To Be a Sham Transaction Directed by Majority Shareholder
Supreme Court of British Columbia, September 5, 2012
Enerex Botanicals Ltd. (“Enerex”) was a British Columbia company, incorporated in 1997 to develop and market a brand
of dietary supplements. The company was incorporated by Barrie Carlsen (“Carlsen”) and his wife Yvette (“Yvette”), and
each held shares in Enerex. Carlsen and a third party, Lan Cheng (“Cheng”), also incorporated a company called Phoenix
Nutraceuticals Ltd. (“Phoenix”), which acted as a supplier and broker of neutraceutical raw materials.
In 2004, Carlsen and Yvette separated and a loan of $200,000 was advanced from Enerex to Carlsen to enable him to
purchase the Enerex shares held by Yvette. In September 2007, a journal entry was made in Enerex’s financial records,
reducing Carlsen’s indebtedness for the loan by $168,000, with an offsetting entry in Carlsen’s shareholder loan
account.
Throughout its history, Enerex had been undercapitalized and in 2008, Carlsen agreed to an investment in the company
by a corporate group known as the Humet Group (“Humet”). That investment, which was carried out through a North
American subsidiary of the Humet Group known as Humet-PBC North America (“PBC”), gave PBC 50.2% of the shares
of Enerex, leaving Carlsen as the minority shareholder. As part of the transaction, Enerex and Phoenix entered into an
employment agreement with Carlsen, for a period of three years, during which he could be dismissed with cause. It was
also agreed that three of the members of the Enerex Board of Directors would be nominated by PBC and that Carlsen
and Cheng, or their nominees, would hold the other two Board positions.
Differences soon arose between Carlsen and the new majority owners of Enerex. In July 2008, Carlsen had prepared a
business plan calling for the $1.83 million in capital, received by Enerex as part of the investment transaction, to be
used to finance various aspects of the company’s business. However, shortly thereafter, following considerable
discussion, the Enerex Board agreed to make a loan of $1 million to PBC. While Carlsen had originally been opposed to
the making of that loan, he eventually voted in favour of it. Thereupon the PBC representatives on the Board suggested
that two of them should receive compensation of $200,000 for their work. Carlsen disagreed, and the matter was
dropped. However, at the annual general meeting of Enerex held in February 2009, one of the PBC directors moved
that the number of directors on the Enerex Board be reduced from five to three. That motion passed, and the three
PBC directors were nominated and elected to fill all three Board positions. While Carlsen remained as President and
Chief Operating Officer of Enerex, both he and Cheng, without prior notice, had been removed from the Board.
In June 2009, Carlsen filed a petition with the courts, alleging oppression on the part of the majority shareholder in
Enerex. Immediately thereafter, Carlsen’s employment with Enerex was terminated. Carlsen brought an action for
wrongful dismissal, and sought leave to bring a derivative action on behalf of Enerex against PBC, in relation to the
$1 million loan. Enerex then brought an action for fraud against Carlsen, in relation to the $200,000 loan.
The actions were dismissed. The Court dealt with each set of allegations by the parties against one another in turn,
beginning with the wrongful dismissal action. Carlsen was dismissed because he had brought an oppression action
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against Enerex, with the company taking the position that maintaining such action was incompatible with his duties
and responsibilities as President and COO of the company. While Carlsen argued that he filed the petition because he
believed that the actions of the Enerex directors were oppressive to the company’s shareholders, the Court agreed with
the company. In the Court’s view, whatever the merits of Carlsen’s petition, his decision to file that petition was
completely incompatible with his duty of loyalty to Enerex. In his position as President, it was essential that he retain
the confidence of the Board and the petition permanently undermined the employment relationship. In the
circumstances, Enerex had just cause to dismiss Carlsen, and the wrongful dismissal action was dismissed.
The Court then considered the derivative action which Carlsen proposed to bring against PBC, alleging that it had not
repaid the $1 million loan made to it by Enerex. While the banking records showed that the loan had been repaid in
three separate instalments, the funds were removed from Enerex’s account almost immediately upon payment. The
funds were then loaned to a company called Hunerex, a company which had been incorporated less than a week before
the loan agreement was executed, and Carlsen alleged that the entire series of “repayment” transactions were in fact a
sham. After reviewing the series of transactions, the Court agreed that the events concerning the repayment and the
subsequent loan to Hunerex were not “free from suspicion”, as there was a circular nature to the transactions and
further, that there were no corporate resolutions approving the Hunerex loan. However, the issue for determination by
the Court was not whether the loan was in the best interests of Enerex, but whether the original loan made to PBC
was repaid. The evidence indicated that Enerex was in fact repaid by a series of transfers to its bank account from PBC.
What Enerex subsequently did with that money was not relevant to the claim against PBC. There was no basis for a
derivative action.
Finally, the Court reviewed the fraud allegations made against Carlsen by Enerex in relation to the $200,000 loan made
to him to purchase the shares held by his former wife. The allegations were that Carlsen had caused that indebtedness
to be reduced by false entries in the accounts of Enerex. The Court reviewed the series of transactions and the entries
made, and concluded that there was no basis for a finding of fraud. In the Court’s view, there was nothing unusual in
the original loan made by Enerex to Carlsen in the context of Carlsen’s marital separation. Further, the Court agreed
with Carlsen that the adjusting entry at the centre of the fraud allegation was in fact proposed by the company’s
auditors. The fraud action was dismissed.
Carlsen v. Enerex Botanicals Ltd., 2012 ACLG ¶79,473
2012 BCLG ¶78,904
2012 CCSG ¶51,341
2012 OCLG ¶51,717
2012 CCLR ¶201,061
CORPORATE BRIEF
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CORPORATE BRIEF
CORPORATE BRIEF
Published monthly as the newsletter complement to the Alberta Corporations Law Guide, the British Columbia Corporations Law
Guide, the Canadian Corporate Secretary’s Guide, and the Ontario Corporations Law Guide by CCH Canadian Limited. For
subscription information, contact your CCH Account Manager or call 1-800-268-4522 or (416) 224-2248 (Toronto).
For CCH Canadian Limited
Stephen Ahad, LL.B., Writer
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Allison Lau, Marketing Manager
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Rita Mason, LL.B., Director of Editorial
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email: Rita.Mason@wolterskluwer.com
© 2012, CCH Canadian Limited
Notice: This material does not constitute legal advice. Readers are urged to consult their professional advisers prior to acting on the basis
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