The Power of Board Policies

Boards of directors often create rules about the affairs of their organizations.  These are recorded in documents which bear the title “policy” or some similar wording.  Typical examples might be a “conflict of interest policy” (setting out procedures and guidelines to be followed as conflicts arise in the conduct of the organization’s affairs) or a “succession policy” (which might outline goals and recruitment procedures for long term successorship in the organization).

The accepted wisdom on board policies has been that their force and effect are generally subordinate to the governing law and the corporate Articles (or society bylaws).  While board policies often elaborate on and supplement provisions in the statute and the governing documents, they should not contradict, restrict or overrule them.

Recently, this accepted wisdom was the subject of some judicial consideration, with a somewhat surprising result.  In the case of  Northern Minerals Investment Corp. v. Mundoro Capital Inc. (2012 BCSC 1090), the British Columbia Supreme Court was required to determine whether a board policy was able to restrict shareholder ability to make nominations for directors to be elected at the annual general meeting (AGM).  Notice of the Mundoro AGM was given in April, 2012.  Northern Minerals was a significant shareholder, and it appears that Northern Minerals may have been planning to propose at the AGM, and support, its own surprise slate of director nominees.  Anticipating this, Mundoro announced in June, 2012 that its incumbent directors had approved an “Advance Notice Policy”, fixing a deadline by which shareholders were required to submit their nominations for director, in advance of the AGM elections.  Under the terms of the policy, only such pre-announced individuals would be eligible for election at the AGM.

Many organizations have similar advance notice requirements for nominations, which are intended to establish an orderly and informed nomination and election process.  However, when they do exist, such requirements are enshrined in the organization’s Articles (or bylaws), where the restrictions have had the sanction of member consideration and approval.  In the Mundoro case, in what might be seen as a tactic of self-preservation not unlike a “poison pill”, the incumbent board simply passed the nomination restrictions unilaterally, prior to a scheduled AGM, as a board “policy”.  After a postponement of the AGM and some other proceedings, the matter wound up in court.

The court upheld the enforceability of the Advance Notice Policy.  The court’s reasoning was based on a broad interpretation of the residual power granted to the directors by the governing statute, to generally manage and supervise the affairs of the organization.  Northern Minerals had argued that a special resolution of the membership was necessary to implement these types of governance restrictions.  The court disagreed, reasoning that it was incorrect to conclude that the directors do not have this type of power unless specifically granted by statute, and that no specific provision of the statute or the Articles denied the directors this ability.

There appears to be minimal consideration in the judgment on the issue of restriction of member rights (to elect directors).  Members of organizations have few rights as it is.  These are usually limited to electing directors, receiving financial statements, appointing auditors, approving of changes to the corporate Articles, and approval of fundamental changes (such as amalgamation).  Members also have remedies against directors of their organizations based on breach of fiduciary duty, or oppressive action.  In the Mundoro case, the court noted that members could separately proceed to pursue oppression or breach of duty remedies against the incumbent directors if they felt that the Board’s decision to enact the Advance Notice Policy was not in the best interests of the organization.  However, as a matter of  governance, the policy was found to be effective, even though it changed the governance rules without any voice or consideration by the membership about the reasonableness of the restriction now placed upon them. 

The court may have been influenced to some extent by the notion that the policy’s effect is primarily procedural, and the policy promotes both transparency and orderly governance.  The conduct of Northern Minerals (intending to nominate surprise candidates from the floor at the AGM) may have seemed less reasonable to the court than the conduct of the incumbent board.  However, from a governance perspective, it remains to be seen if this decision will truly support an expansion of the scope of governance matters which boards can unilaterally implement by “policy”, without consultation with or approval of the membership at large.  After all, sometimes nominations from the floor at the AGM can be a good thing.  Should it be the members, or their board, who decide whether or not that should be permitted? 

Also, if the  Mundoro Advance Notice Policy had also required any pre-submitted nomination to have the endorsement of a specified percentage of the incumbent board, would the litigation result have been the same?  Should the apparent reasonableness of the substance of any particular governance rule truly play a role in determining the correct forum to effect that change?