Shareholder representatives are protesting the growing number of Canadian companies that are passing U.S.-style bylaws to make their home province the only jurisdiction where investors can sue in certain types of cases.
At least 14 Canadian companies adopted exclusive forum bylaws in 2015 to ensure an array of lawsuits – many involving shareholder issues – must be heard in courts in their home province, arguing that other jurisdictions carry too much cost and risk.
Lawyer Dimitri Lascaris of Siskinds LLP, who specializes in launching class-action lawsuits, said the bylaws unduly limit shareholders’ legal options about where to sue a company, and anticipates they will end up being appealed.
“There will be a big fight over this – it will go all the way up to the Supreme Court of Canada,” Mr. Lascaris said.
While the exclusive forum trend is new in Canada, hundreds of U.S. companies have already adopted similar bylaws, often insisting that cases be heard in Delaware, which is the leading U.S. venue for business-law matters.
Yamana Gold Inc. is the only Canadian company that has so far put its bylaw amendment to a shareholder vote, winning a narrow 52-per-cent support for the change this year. The board of Dundee Corp. approved a bylaw change that will require a shareholder vote in 2016.
Other companies – including Hydro One Inc., Shopify Inc. and Shred-It International Inc. – adopted the bylaws when they went public in 2015, so they did not need a shareholder vote to approve an amendment.
Exclusive forum bylaws cover various kinds of litigation, including shareholder lawsuits known as oppression and derivative claims. But they also encompass varying other types of legal action, depending on their wording.
Yamana’s bylaw, for example, says Ontario will be the exclusive forum for lawsuits “regarding a matter of the regulation of the business and affairs of the corporation, including (without limitation) the articles, bylaws, internal affairs, governance, status, internal controls and procedures of the corporation.”
Mr. Lascaris believes the broad wording means the bylaws could cover an array of cases, including some types of class-action lawsuits as well as cases that are filed by employees or creditors.
He said there are many procedural and substantive legal differences between provinces, so investors need flexibility about where to file cases. British Columbia, for example, requires people who don’t live in the province to expressly opt-in to be covered by a class action, which creates a major disincentive for lawyers to pursue a large class-action in B.C. because they can’t assess up-front how big the class will be, he said.
Mr. Lascaris said companies that feel vulnerable to certain types of litigation will be most likely to adopt exclusive forum bylaws if they know their home province’s laws are favourable in that area.
“This is really just an invitation for defendants to forum-shop,” he said. “They’re constantly complaining about plaintiffs forum-shopping, but this seems to me like they’re talking out of both sides of their mouth.”
Institutional Shareholder Services (ISS), which advises large investors on how to vote their shares, has recommended its clients vote against almost all exclusive forum bylaws in the United States in recent years, and opposed the bylaw change at Yamana in Canada.
John Roe, executive director of ISS Corporate Solutions, said shareholders are being asked to trade off a valuable right without being clearly told what they are gaining in return. He said many companies haven’t been hit with lawsuits filed in other regions, and do not adequately explain why they need the bylaws and what potential legal-cost savings could result.
“There hasn’t been demonstrated economic harm for a company due to having litigation coming in from other jurisdictions,” Mr. Roe said.
Corporate lawyers say the bylaws are intended to provide an extra layer of protection from lawsuits in other regions where legal regimes are different and outcomes can be far more costly. But they argue that the bylaws will not have a major impact because most cases they cover are already being fought in a company’s home province.
Lawyer Allan Coleman, a litigator who works for companies facing lawsuits, said the bylaws could be most useful for companies incorporated under federal business legislation, because they can clarify which province’s courts must be used for shareholder litigation.
He said he doesn’t believe the bylaws are intended to be used for securities class-action cases. Companies would be unlikely to get approval to shift typical securities class-action cases from the U.S. to Canada, he said, because U.S. courts have made it clear they have jurisdiction when shares are sold to Americans. However, he said the bylaws could help companies get approval to move other types of U.S. lawsuits to Canadian court.
“It just adds incremental certainty,” Mr. Coleman said. “It may be more belt and suspenders than anything else. But it is an additional layer of argument you could have if you were sued in the U.S., in addition to the argument you would traditionally make.”
Lawyer Ed Waitzer said he expects more exclusive forum bylaws to be adopted next year, particularly by companies concerned about foreign litigation. He said many companies don’t want to be the first to implement a new practice and draw attention to themselves, but they will follow once it is established.
“From my perspective, it’s a good precaution to put in,” he said. “It may well be the choice of forum would end up being Canada anyway, but why not stick it in your bylaws just to remove uncertainty?”
However, Victor Li, vice-president at Kingsdale Shareholder Services, said companies seeking shareholder approval for a new bylaw will have to manoeuvre in a complex environment.
Proxy firms like ISS and Glass Lewis will likely oppose the proposals, he said, while shareholders are divided in their views. Many large institutional investors will support the bylaws because they are unlikely to ever sue and don’t want the company to waste money on excessive litigation, but others will want to keep their legal options open.
“It makes it harder for the company to manage shareholders because not only do you have to deal with ISS and Glass Lewis, but you have to deal with many large shareholders who tend to have their own opinions, and sometimes the opinions are different,” he said. “So how do you manage that? It’s really hard to satisfy everyone now.”Report Typo/Error