Part 17 published on 01/02/07
Proxy solicitations must not be misleading
[Editorial Note: This Court decision does not deal with a condominium corporation. It deals with a publicly traded real estate investment company. Nevertheless, I believe that the principles expressed in this decision have equal application in the condominium setting.]
Griffin is a publicly traded real estate investment company. Kluwak was one of a number of dissident shareholders who were concerned about Griffin’s strategic direction and management. They waged a campaign to obtain proxy votes in order to oust the existing Board. The dissident group sent circulars to all shareholders, in order to solicit their proxy votes.
The dissident Group was able to obtain the votes required to change the Board. However, Pasternak (the incumbent director and Chairman of the Board, who chaired the AGM) rejected the proxy votes, on the basis of legal advice. The Corporation’s lawyer advised that the proxy votes should be rejected because the circulars were misleading. As a result, the incumbent Board was re-elected.
Kluwak made application to Court to set aside the election and to have the proxies accepted.
The Court agreed that the circulars distributed by the dissident owners were misleading in many material respects. The circulars contained missing or misstated facts that would be considered important by a reasonable shareholder (in deciding how to vote). Therefore, the proxy votes were unreliable. However, the Court said that the proper remedy would be to delay the election until there had been an opportunity to correct the misleading circulars. The Court said:
“I am concerned that management raised no concerns with the dissident proxy circular prior to the AGM… It was manifestly unfair to ‘wait in the weeds’ until the meeting itself to raise the objections. A better course would have been to request the dissidents to correct their circular and adjourn the AGM if necessary, or to apply to the Court for a determination of whether the proxy was materially misleading, and, if it was, to give an opportunity to the dissident group to correct it.”
The Court accordingly declared that the election was invalid and ordered a new election to be held at a new AGM. The Court ordered that the AGM be held at a date that would give sufficient time for the dissident group to correct the material misstatements in the dissidents’ proxy circular, and for management to amend its own management circular if desired, and have both disseminated to the shareholders. In the event of continuing disputes about the information disseminated to shareholders, the parties could return to the Court for further direction.
[Editorial Comment:
The Relevance for Condominiums
These sorts of situations are not uncommon in the condominium setting. A group of owners may be unhappy with the incumbent Board and may send circulars to all owners as part of a campaign to gather proxy votes (in order to oust the Board). The Kluwak v. Pasternak decision tells us that careful steps may be required if the distributed circulars are considered misleading. In particular, steps should be taken, without delay, to correct the misleading statements. These steps could include the following:
- The incumbent Board should contact the dissident group of owners, in order to point out the misleading statements, and to afford those owners an opportunity to correct those statements by way of further circulars to all owners.
- The incumbent Board may distribute its own “correcting circulars”.
- In extreme cases, it may be appropriate to seek direction from the Courts.
In the meantime, any election should be delayed until such time as all owners have received complete and accurate information as necessary to allow the owners to make proper, informed decisions about how to vote.]