The Ontario Superior Court of Justice has released its judgment in a case involving the triggering provisions in change-of-control agreements between a company and its senior executives – commonly known as golden parachutes.
The case involved a proxy fight initiated by Crescendo Partners LLP in respect of Call-Net Enterprises. Crescendo had requisitioned a special shareholders' meeting to replace six of the nine Call-Net directors. Call-Net had change-of-control agreements with senior executives that provided for substantial payments if there was a change of control and subsequent voluntary or involuntary termination. Call-Net also had agreements with bondholders that triggered a repurchase obligation in the event of a change in the majority of the board. To avoid this obligation, representatives of Call-Net and Crescendo reached a compromise whereby the board was restructured without changing the majority.
Before the special meeting, Call-Net entered into a trust agreement and deposited $30 million in order to fulfill Call-Net's obligations to its executives in the event Crescendo succeeded at the meeting. Based on the compromise with Crescendo, Call-Net terminated the trust agreement, warranting that no change in control had occurred. A number of executives challenged the termination. It was agreed among the parties that the shares and proxies held by Crescendo exceeded the threshold in the change of control agreements.
The court, while validating the legitimacy of golden parachutes in order to retain and ensure the loyalty of executives in the face of potential or actual attempts by outsiders to gain control of a corporation, determined that the operative language did not encompass the proxies held by Crescendo. By denying the executives' claim, the court affirmed the shareholder/proxyholder relationship as one of agency. Because it is revocable and requires the proxyholder to act in accordance with the instructions of the shareholder, a proxy does not confer the right to control or direct the voting power of the corporation.
Leslie Gord and Nicholas Dietrich
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