Decisions

MARVIN MEIER, et. al. [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1999-05-07
Effective Date:
1999-04-29
Details:


COR#99/111

IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418

AND

IN THE MATTER OF MARVIN MEIER, JAMES N. HOLDEN,
QUINTON FARRAR AND PETER WARWICK

AND

IN THE MATTER OF RMS MEDICAL SYSTEMS INC.

AND

IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE


HEARING

PANEL:ADRIENNE R. WANSTALLMEMBER
BRENT W. AITKENMEMBER
JOAN L. BROCKMANMEMBER

DATE OF HEARING: DECEMBER 29, 1998


APPEARING:J. A. (SASHA) ANGUSFOR COMMISSION STAFF
ALAN H. FINLAYSONFOR MEIER, HOLDEN,
FARRAR AND WARWICK
ROBERT HOLMESFOR RMS MEDICAL
SYSTEMS INC.
R. DAVID TOYODAFOR BLACKCOMB
HOLDINGS LTD

REASONS FOR DECISION

1. INTRODUCTION

On December 21, 1998 Marvin Meier, James N. Holden, Quinton Farrar and Peter Warwick (the “Applicants”) applied to the Commission under section 28(1) of the Securities Act, R.S.B.C. 1996, c. 418 for a hearing and review of a decision of the Vancouver Stock Exchange made December 9, 1998 with respect to RMS Medical Systems Inc. and for a stay of that decision. The decision of the Exchange was to accept for filing a Technology Transfer Agreement dated August 25, 1998 (the “TTA”) under which RMS agreed to sell assets that constitute all or substantially all of its property to Blackcomb Holdings Ltd., a private company.

On December 22, 1998 the Commission stayed the implementation of the transaction pending a hearing as to whether, under section 28(1) of the Act, the Applicants were “directly affected” by the Exchange decision. That hearing was held December 29, 1998. At the conclusion of the hearing, we issued the following decision:
      On the 9th of December 1998, the Vancouver Stock Exchange made a decision, accepting for filing a Technology Transfer Agreement dated August 25, 1998 between Blackcomb Holdings Ltd. and RMS Medical Systems Inc.
      On December 21, 1998 the Applicants applied for a hearing and review of the Exchange’s decision and a stay of that decision.
      On December 22, 1998 the Commission set down the matter for today, to determine whether, under section 28(1) of the Act, the Applicants are directly affected by the Exchange’s decision.
      This Commission also stayed the decision until we made this determination.
      After reviewing the evidence presented and the submissions of counsel, we have determined that, considering all the relevant circumstances, the Applicants are not directly affected by the Exchange’s decision to accept the Agreement for filing for the purposes of section 28(1) of the Act.
      What the Applicants were directly affected by were the alleged irregularities in connection with the shareholders meeting of October 23, 1998 and the resolutions passed at that meeting.
      We are of the view that the Company Act [R.S.B.C. 1996, c. 62] provides the Applicants with effective remedies, and that the Supreme Court has clear jurisdiction under the Company Act to deal with these matters.

      In light of the circumstances and of the still outstanding application by the Executive Director for a hearing and review of the Exchange’s decision, we order under section 165(5) of the Act that the Exchange’s decision be stayed until 12 o’clock noon on Thursday, December 31, 1998 in order to allow the applicants to apply to court should they choose to do so with respect to this matter.

These are the reasons for our decision.


2. BACKGROUND

History of the Transaction

RMS is a reporting issuer in British Columbia and its common shares are listed on the VSE. As of August 18, 1998 RMS had outstanding approximately 7.8 million common shares, of which 18.75% were held by Donald Gee, President of RMS and 10.77% were held by the Applicant Meier.

The Applicants Meier, Farrar and Warwick are shareholders and former directors of RMS. The Applicant Holden is a shareholder.

The principal assets of RMS consisted of intellectual property, being retractable needle patents and related technology which RMS developed prior to 1998. RMS had neither the financial resources to apply for the regulatory approvals that were necessary for commercialization, nor the access to the capital required for the construction of production facilities. Its attempts to find financing for these purposes proved unsuccessful.

In these circumstances, RMS determined that the best course of action would be to sell the technology. After what RMS calls an “exhaustive” search for a buyer, Blackcomb emerged as the only purchaser. Accordingly, RMS entered into the TTA whereby the technology would be transferred to Blackcomb for U.S.$700,000 of which $200,000 was payable in cash and $500,000 was payable in royalties.

The TTA was approved unanimously by all of the directors of RMS, including the Applicants Meier and Farrar, who were directors at the time. The annual general meeting of RMS was intended to be held on September 25, 1998, at which time the shareholders were to be asked to approve the TTA.

On September 25, 1998 the shareholders adjourned the annual general meeting to October 23, 1998.

Between September 25 and October 23 RMS and Blackcomb began negotiations for a transaction whereby Blackcomb, instead of purchasing the technology, would finance RMS by way of private placement so that commercialization of the technology would take place within RMS. Blackcomb was only prepared to do so if all outstanding escrow shares were transferred to Blackcomb for a nominal sum, so that Blackcomb could be assured of having control of RMS. This was apparently agreed to by all of the escrow shareholders except the Applicant Meier. In the meantime, Blackcomb preserved all of its rights under the TTA.

The Blackcomb private placement was also approved unanimously by all of the directors of RMS, including Meier and Farrar. The approval was subject to further study of the proposal by board committees. There was a discussion among the directors in which the idea of deferring the annual general meeting from October 23 to November 18 was considered if an agreement could be reached with Blackcomb on the terms of the private placement.

Under the Company Act, the approval of either option (the TTA or the private placement) required the affirmative vote of 75% of the shareholders present at the meeting in person or by proxy. The applicant Meier held over 10% of the shares, and since a relatively small proportion of RMS shareholders were expected to attend the annual general meeting, either in person or by proxy, it was common ground between the parties that if he were present at the meeting Meier’s votes would be necessary to reach the 75% threshold.

Meanwhile, the Applicant Meier was having independent discussions with Blackcomb. Meier made it clear to Blackcomb that he would not vote as a shareholder in favour of either transaction unless Blackcomb agreed to pay him cash, grant him options, grant him exclusive Canadian distribution rights for the technology and retain him as a consultant or, in lieu of all that, pay him a large sum of cash. This Blackcomb refused to do and the private placement option fell through.

By this time, RMS was in severe financial difficulty. One of its preferred creditors was threatening to enforce its security.

The annual general meeting proceeded on October 23. The Applicant Meier was not present and the TTA was approved by the shareholders.

The TTA was then submitted to the Exchange pursuant to Exchange Policy No. 18. Under Policy 18, a listed company cannot complete a material transaction, as defined in that Policy, until the relevant documentation has been accepted for filing by the Exchange.
      The Exchange accepted the TTA for filing on December 9, 1998.

The October 23 Annual General Meeting

The Applicants allege that Donald Gee misled them into thinking that the October 23 meeting would take place only for the purpose of adjourning it to November 18. They also allege various irregularities in connection with the October 23 meeting. It is their contention that they were duped into not attending the October 23 meeting because Gee knew that if they attended the meeting they would vote against the TTA and it would not be approved.

For his part, Gee acknowledges that there was some discussion about adjourning the meeting while the private placement was a possibility, but he says that notion fell away when Blackcomb decided not to proceed with the private placement and to complete the TTA.

In any event, the alleged irregularities were drawn to the Exchange’s attention by the Applicants before the Exchange accepted the TTA. The Exchange also received a lengthy letter from the Commission staff that outlined staff’s concerns about the circumstances surrounding the conduct of the meeting. As a result of this, the Exchange made inquiries of RMS and in response received a legal opinion of counsel to RMS that the meeting was validly held.

In considering whether to accept the TTA for filing, the Exchange Listings Committee relied on the legal opinion. The Committee also noted that the dispute was civil in nature and that counsel for the dissenting shareholders had asked for approval to be withheld for 14 days to provide an opportunity to seek civil remedies. On December 9, 1998 the Exchange accepted the TTA for filing with the proviso that the parties could not close the transaction until for at least 14 days.
      The next event was the Applicants’ application to the Commission described at the beginning of these reasons.


3. ANALYSIS

At the outset it is important to clarify what decision was made by the Exchange. The Applicants argue that the Exchange made two decisions: first, that the October 23 shareholders meeting was validly held, and second, to accept the TTA for filing.

We rejected the Applicants’ submission that the Exchange made a decision that the October 23 shareholders meeting was valid. To the contrary, the Exchange recognized that there may very well have been irregularities with respect to that meeting. Rather than make a decision as to the validity of the meeting, the Exchange chose to rely on the legal opinion of RMS counsel. Noting that the controversy was a civil dispute, the Exchange also required RMS to delay the closing of the transaction for 14 days in order to give the Applicants the opportunity to take legal action if they so chose.

We therefore found that the only decision of the Exchange which could be the subject of a hearing and review was its decision to accept the TTA for filing. The consequence of this decision was that RMS and Blackcomb were free to complete the transaction contemplated by the TTA once the 14 day delay imposed by the Exchange had expired.

The sole issue for determination by the Commission at the hearing on December 29, 1998 was therefore whether the applicants were persons entitled to apply under section 28(1) of the Act for a hearing and review of the Exchange’s decision to accept the TTA for filing.
      Section 28(1) reads as follows:
      28. (1) The executive director or a person directly affected by a direction, decision, order or ruling made under a bylaw, rule or other regulatory instrument or policy of a self regulatory body or an exchange may apply by notice to the commission for a hearing and review of the matter under Part 19, and section 165(3) to (5) applies.

Therefore, if the Applicants were to have standing to apply for a hearing and review, they had to establish that they were persons “directly affected” by the Exchange’s decision to accept the TTA for filing.

The Applicants argued that they were directly affected by the Exchange’s decision because if the TTA were completed RMS would be converted from an operating company into a shell and the Applicants’ economic interest would be affected. They also argued that because Exchange Policy No. 18 is intended to protect shareholders, and that because they are shareholders, they are entitled to standing.

Commission staff supported the Applicants, putting forth the proposition that persons whose economic interests have been affected by decisions of the Exchange are persons who are directly affected by its decisions.

RMS argued that “directly affected” ought to be interpreted narrowly, and that on such an interpretation, the Applicants were not directly affected by the Exchange’s decision.

Section 28(1) does not require a person who seeks a hearing and review merely to be “affected” by the decision, but to be “directly affected”. By including the word “directly” the legislature must have intended a narrowing of the word “affected” and indeed the authorities have tended to agree.

In Schaefer v. Yukon Liquor Corporation, (1997) Y.T.S.C., Whitehorse Registry No. 97-A0051, the Yukon Liquor Corporation Board issued a liquor licence to certain premises. A neighbor sought to overturn the decision. His application was rejected for want of standing. The court said (at paragraph 5):
      There is no question that Mr. Schaefer is extremely upset by the Board’s decision . . . . He lives close by; he does not drink alcohol; and he is concerned that the presence of a liquor establishment will decrease the value of his property as a result of increased noise and litter, increased vehicular traffic, and unpleasant behaviour such as intoxicated patrons fighting and yelling. However, the Act limits the right of persons to apply for judicial review to “parties directly affected by the decision or order.”
      In theory, the parties directly affected by the Board’s decision could extend beyond the [Yukon Liquor Corporation] and [the successful applicants]. For example, in other circumstances, an establishment with a liquor licence in a community to [sic] small to support two licensed establishments might be another party. However, here Mr. Schaefer is one of a number of residents in the community who may be interested in, and to some degree, potentially affected by, the Board’s decision. I conclude that he does not fall within the definition of “a party directly affected by the decision or order” . . . .

In Costco Wholesale Canada Ltd. v. B.C. Assn. of Optometrists, (1998) B.C.S.C., Vancouver Registry Nos. A972324/A980248, Victoria Registry No. 972522, two optometrists were cited by the Board of Examiners for Optometry for violating a rule prohibiting optometrists from engaging in business relationships with opticians or optical companies. The two optometrists sought judicial review of the decision. Costco wished to establish optical departments in its retail outlets with optometrists on site. It sought standing to join the petition of the two optometrists for judicial review. The court said (at paragraph 14):
      I consider there to be only two possible grounds upon which Costco could claim standing to petition for judicial review in the circumstances: either as a party directly affected by the Rules in the sense that it would be subject to censure in the event of a violation, or as a private party having status to challenge the Rules because it is “exceptionally prejudiced” by their application . . . . Costco is neither. It could not be cited for a violation and the impugned rules do not affect it any more than any other citizen, certainly not to the exceptional degree necessary for standing.

In Doman Industries Ltd. v. British Columbia (Superintendent of Brokers), (1996) B.C.C.A., Vancouver Registry No. CA022346, on an application for leave to appeal, the Court rejected the argument that Doman Industries Ltd. was not “directly affected” by the Commission’s order against its president, Herb Doman. Doman had been prohibited from acting as a director and officer of Doman Industries for 10 years, or, if Doman Industries accepted certain conditions, for one year. Among the conditions was a requirement that a committee of independent directors of Doman Industries supervise purchases and sales of company shares by employees and report annually thereon to the Executive Director.

The Court (at paragraph 11) concluded that Doman Industries was directly affected by the Commission’s order, because it would be “forced to interfere with its employees’ personal rights to buy and sell its shares as a price of getting its president back.”

This Commission considered the meaning of “directly affected” in GHZ Resource Corporation, [1992] 27 BCSC Weekly Summary 18 and Greenwell Resources Corporation and Supreme Resources Inc., et al, [1992] 8 BCSC Weekly Summary 5. GHZ was a hearing and review of a decision of the Exchange suspending trading in the shares of GHZ. A group of shareholders sought standing in the application as persons directly affected by the Exchange’s decision. Their application for standing was rejected by the Commission. The Commission said (at page 19):
      In Greenwell Resources Corporation and Supreme Resources Inc. et al . . . the Commission considered whether Advance Capital Services Corporation, as a shareholder of Greenwell and Supreme, was a person directly affected by temporary orders issued under section 144 [now section 161] of the Act that all trading cease in the securities of Greenwell and Supreme. At page 11, the Commission stated:
          The reason for the Temporary Orders, as set out on their face, was that Greenwell and Supreme had failed to make the disclosure required by the Act and, in the case of Supreme, that Exchange approval had not been obtained for a share issuance. Greenwell and Supreme, the issuers of the securities cease traded and the persons whose conduct was in question, are directly affected by the Cease Trade Orders. Advance, as one of the class of persons who are shareholders of Greenwell and Supreme, is incidently [sic] affected but not directly affected by the Cease Trade Orders.
      In the matter before us . . . GHZ is directly affected by the decision. . . . while the shareholders may be incidently [sic] affected by the decision, the shareholders are not directly affected by the decision for the purpose of section 15 [now section 28] of the Act.

In Re Instinet Corporation (1995), 12 C.C.L.S. 23, the Ontario Securities Commission, in considering the factors that ought to be considered in determining whether a person is directly affected by a decision of the Director (now the Executive Director) of the OSC, said (at page 39):
      The words “directly affected” in subsection 8(2) [the Ontario provision comparable to section 165(3) of the Act, which allows persons directly affected by a decision of the Executive Director to request a hearing and review of the decision] of the Act should be interpreted in light of all of the relevant circumstances. The interpretation to be given to the words in the context of a decision relating to a take-over bid may well be different than in the context of a registration decision. In each case under subsection 8(2), in determining standing, the Commission must look at the nature of the power that was exercised, the decision that was made, the nature of the complaint being made by the person requesting the hearing and review and the nature of that person’s interest in the matter.

The Commission went on to refuse standing to the four major Canadian stock exchanges and the Investment Dealers Association of Canada to apply for a hearing and review of a decision by the Director to register Instinet as an international dealer under the Ontario Securities Act, as they had not established that they were directly affected by the decision.

These cases establish that a person directly affected has to be someone who is affected by the terms of the order or decision, not just the incidental effects of the decision. These decisions suggest that this is someone who is a party to the proceedings that lead to the decision or someone to whom the terms of the order or decision relate .

Applying these decisions to the case before us, the parties directly affected by the Exchange’s decision would include RMS as a party, and Blackcomb, as a party to which the terms of the decision related.

The Applicants, however, are not directly affected. There is nothing in the terms of the Exchange’s decision that relates to them. They are affected no differently than the other shareholders of RMS. Their position is indistinguishable from that of the unsuccessful applicants in the cases reviewed above.

The Applicants argued that Exchange Policy No. 18 is intended to protect shareholders, and that therefore, as shareholders, they are directly affected. However, to establish standing, an applicant who is a shareholder must do more than show that the impugned decision relates to a policy designed for the protection of shareholders. Otherwise, the effect would be to interpret “directly affected” so broadly as to give no meaning to the word “directly”.

As authority for their proposition, the Applicants rely on a decision of this Commission, In the Matter of Bradstone Equity Partners Inc., [1998] 20 BCSC Weekly Summary 5 (the decision) and [1998] 23 BCSC Weekly Summary 15 (the reasons). In Bradstone, a shareholder, Bradstone Equity Partners Inc., applied to the Commission for a hearing and review of a decision of the Exchange not to require Peruvian Gold Limited to obtain shareholder approval to make a share exchange take over bid for all the shares of Gabriel Resources Ltd. Shareholder approval was not required under applicable corporate legislation. Bradstone’s standing to make the application was challenged.

The Commission granted Bradstone standing, relying for authority on In the Matter of Canada Malting Co. Limited (1986), 9 O.S.C.B. 3565. In Canada Malting, the OSC was considering a decision of The Toronto Stock Exchange not to require shareholder approval of an issuance of shares to the company’s two largest shareholders. Approval was not required under applicable corporate legislation. Referring to Canada Malting, the Commission said (at page 37):
      At page 3571, the OSC observed that:
          . . . counsel for the OSC, who supported the Applicants in their argument for standing, argued that [Toronto Stock Exchange] By-law 19.06 is intended to protect minority shareholders of listed companies by giving the TSE discretion to require shareholder approval of transactions which involve significant dilution, non-arm’s length elements, or changes in control.

Considering the Peruvian takeover bid, the Commission noted that if the transaction was completed, the result, among other things, would be a change in control of Peruvian and substantial dilution for the holders of the Peruvian common shares without the shareholders having the opportunity to approve the transaction. In addition, the Commission identified other aggravating factors: a substantial change in the board of directors, a substantial increase in issued capital and a shift in focus of company operations.

This case has little in common with Canada Malting or Bradstone. In those cases, the issue was whether the minority shareholders ought to have the right to vote on the proposed transaction in circumstances where shareholder approval was not required under applicable corporate legislation. In this case, shareholder approval was obtained as required under the Company Act. Furthermore, the completion of the TTA would not result in any dilution to RMS shareholders nor in a change of control of RMS. There were no non-arm’s length elements. Finally, almost none of the aggravating factors identified in Bradstone were present.

If the Applicants were directly affected by anything, it was by the alleged irregularities in connection with the meeting of October 23, 1998 and the resolutions passed at that meeting. Given that the requirement for shareholder approval in this case was under the provisions of the Company Act, the Supreme Court is the appropriate forum in which to deal with the Applicant’s concerns. Under the Company Act, that Court has been given jurisdiction to deal with these matters.

For these reasons, we found that the Applicants were not directly affected by the decision of the Exchange and therefore could not bring an application for a hearing and review under section 28(1) of the Act.


DATED on April 29, 1999.

FOR THE COMMISSION


Adrienne R. WanstallBrent W. Aitken
MemberMember

Joan L. Brockman
Member


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