A settlement between First Capital Real Estate Investment Trust ("First Capital") and Sandpiper Real Estate Fund 4 Limited Partnership et. al. ("Sandpiper") ended Sandpiper's activism campaign seeking to replace four members of First Capital's board of trustees (the "Board") at a requisitioned meeting that would have been held on March 28, 2023. The settlement came about a month after the Ontario Superior Court of Justice (the "Court") in Sandpiper Real Estate Fund 4 Limited Partnership v. First Capital Real Estate Investment Trust, 2023 ONSC 794 ("Sandpiper") ordered First Capital to hold a requisitioned meeting of unitholders to vote on Sandpiper's proposal as soon as practicable after March 1, 2023. Sandpiper provides helpful guidance to boards as to when to hold a requisitioned meeting. It also details what factors should be considered when making that decision to ensure that courts defer to the board's decision.
On Dec. 12, 2022, Sandpiper requisitioned a special meeting of unitholders of First Capital to be held by March 1, 2023 for the purposes of voting to replace four members of the Board with Sandpiper's proposed slate. The results of voting at this meeting would determine the composition of the Board responsible for overseeing First Capital's capital allocation and portfolio optimization plan (the "Optimization Plan") announced on Sept. 22, 2022. In response, on Dec. 30, 2022, First Capital announced that its Board had called a combined annual general and special meeting of unitholders to be held on May 16, 2023, approximately five months after the date of Sandpiper's requisition.
Requisitioning a meeting
Canadian corporate statutes establish a regime for shareholders to requisition a meeting of shareholders. The provisions of these statutes were reflected in First Capital's declaration of trust which governed the rights of First Capital's unitholders and the duties of the Board. These statutes require boards to call a requisitioned meeting within 21 days of the requisition date. However, with the exception of the Business Corporations Act (British Columbia), pursuant to which directors must hold a requisitioned meeting not more than four months after the date of the requisition, other provincial and federal statutes do not prescribe the time periods within which a board must hold the meeting once it has been requisitioned. Neither did First Capital's declaration of trust.
In Sandpiper, the Court confirmed that a board's determination as to when to hold a requisitioned meeting is subject to the business judgment rule. Provided the meeting is held "expeditiously and within a reasonable time", courts will defer to the business judgment of the board in setting the date.
The business judgment rule applied to requisitioned meetings
In analysing the reasonableness of the Board's decision, the Court considered whether the Board applied the "appropriate degree of prudence and diligence" in coming to its decision to hold the requisitioned special meeting together with its annual general meeting on May 16, 2023.
The Court concluded that the Board's decision could not benefit from the business judgment rule. The Court held that the Board's decision making process "[did] not reflect a robust, independent and objective process of deliberation." In particular, the Court expressed concerns with the fact that:
- the Board held only a single meeting to consider Sandpiper's requisition;
- the Board meeting lasted only approximately two hours and other agenda items were discussed; and
- the four members of the Board that Sandpiper sought to replace were present and voted on the resolution passed at the Board meeting.
The Court then rejected the Board's three stated reasons for its decision to wait until May 16, 2023 to hold the special meeting together with its annual general meeting.
The first reason was to avoid the added cost and distraction of holding two separate meetings. While the Court held that this was a reasonable justification in Marks v. Intrinsync Software International Inc., 2013 ONSC 727, it was not compelling for the Court in this case. Since First Capital is a large company, the estimated cost savings for combining the meetings was only approximately 0.1% of First Capital's revenues and First Capital had a good track record for unitholder turn out and engagement at past meetings held in close succession.
The second reason was to allow the Optimization Plan to further unfold. The Court stated that absent any specific steps or event that would assist unitholders in their decision making, simply waiting to see if something might happen or if financial results might improve was not a reasonable justification for delaying the meeting. The Court also found that the Board's refusal to delay the Optimization Plan until after May 16, 2023 would diminish (even if not render moot) Sandpiper's objective of introducing four new members to the Board to check the Board's oversight and supervision of the Optimization Plan. Also, it was not clear from the Board's minutes that this prejudice was identified or considered as it ought to have been.
The third reason was to provide unitholders more time to consider information and engage with the Board. The Court found that this was not compelling given that the first quarter of 2023 financial statements and performance information that the Board suggested would enhance unitholders' decision making would not be available until early May in advance of the special meeting scheduled on May 16, 2023.
The Court concluded that the Board's decision to hold the special meeting approximately five months after the date of Sandpiper's requisition, together with an early annual general meeting, resulted in an "unreasonable or unjustifiable" delay. Accordingly, the Court granted Sandpiper's application and ordered that the special meeting be held on March 1, 2023 or as soon thereafter as it could be held with the materials (including First Capital's 2022 annual financial statements) distributed to unitholders 21 days in advance of the meeting.
About a month after Sandpiper and following a refresh of the Board with other directors, a settlement between the parties was announced on March 6, 2023. Sandpiper abandoned its campaign to nominate four members to replace current members of the Board and withdrew the meeting requisition for the special meeting that would have been held on March 28, 2023.
For future reference
Sandpiper is a timely reminder to all boards of the process to follow and factors to consider when setting the date for a requisitioned meeting. A truly considered process may require more than a single meeting of the board. And during those meetings, any potential conflicts of interest and prejudice to requisitioning holders should be addressed. In some cases, this might require creating a special committee or using in camera sessions where individuals with potential conflicts of interest recuse themselves from participating in discussions and voting on resolutions to be passed at the board meeting. In addition, the entire process and factors considered should be properly documented in the minutes of the meeting(s) of the board (and special committee, if applicable).
The settlement is also a reminder to boards that engaging with activist investors outside of court may in some cases be more fruitful than a lengthy and costly legal battle, particularly in light of the unique and increasingly complex challenges that stakeholder activism may create for public companies, their boards and, if applicable, their special committees.
For more information and guidance, please contact any member of our Capital Markets Group or Governance, Activism & Investigations Group.
 Sandpiper Real Estate Fund 4 Limited Partnership v. First Capital Real Estate Investment Trust, 2023 ONSC 794, para. 14.