Law Times

Law Times • augusT 21, 2017 Page 7 www.lawtimesnews.com Rule against perpetuities remains alive BY JEFFREY W. LEM I am convinced there is an entire genera- tion of real estate lawyers that simply do not know what the rule against perpe- tuities actually is. I would also bet that, among those practitioners that sort of re- member what the rule actually is, very few of them can accurately articulate the rule or describe the scenarios where the rule can have real-world consequences for real estate transactions. Indeed, it is unlikely that there are more than a few practitioners that can comfort- ably discuss the rule. In the meantime, the rest of us are left desperately clinging to the comfort afforded us in Lucas v. Hamm, 56 Cal. 2d 583, 364 P. 2d 685. That's the California case that excused a lawyer from professional negligence over a mistake be- cause, according to the court, the rule was just too complicated for the average lawyer to possibly ever comprehend. Unfortunately, it is unlikely that Lucas v. Hamm would be a defence against pro- fessional negligence in Canada. Take the recent Ontario Court of Appeal decision in 2123201 Ontario Inc. v. Israel Estate, 2016 ONCA 409, 70 R.P.R. (5th) 169. The case reminds us that the rule is alive and well, at least in Ontario, and can have sig- nificant consequences for real estate con- veyances unaware of its impact. The facts in Israel Estate are rela- tively simple. In 1931, an owner sold a gravel quarry to operators who imme- diately granted an option back to the owner allowing the owner to reacquire the property, at a nominal price, once the gravel in the quarry was ex- hausted by the operators. The option was registered on title and that registration was constantly renewed in accordance with the statute. Nearly 85 years later, the gravel operators' successors reneged on their obligations under the option. Instead, they argued that once the gravel had been depleted, the original owner had no right to reacquire the property pursuant to the option, because the rights under that op- tion are void by operation of the rule. The Court of Appeal agreed with the operators — the rule was very much alive and well in Ontario and practitioners were to ignore it at their own peril. Brief ly put, the rule states that no mat- ter what the intent of the conveyancing document, no legal interest in property is valid unless it vests within the lifetime of a life-in-being, plus 21 years. Applied to Is- rael Estate, the rule would automatically render the option void unless it could be shown that the gravel was in fact depleted before 2001 (a date that was 21 years after the owner's death). The Court of Appeal concluded that the rule applied in Israel Estate. Accord- ingly, the original owner's re-acquisition rights were contingent upon the gravel being depleted by 2001. This did not happen, so his rights did not vest within the per- petuities cut-off period, and the option was, therefore, rendered void by operation of the rule. The continued applica- bility of the rule as part of Ontario law was undisputed, and the case turned on the nature of the option agree- ment itself. That's because the agreement was an unusual instru- ment, and the Court of Appeal had to first determine whether it purported to create an interest in land. If the option agreement did create an interest in land, then that in- terest in land was subject to the rule. If the option agreement did not create an interest in land (and was more of a per- sonal right such as a right of first refusal), then it might have survived the ravages of the rule. Ironically, the Court of Appeal determined that the true intention of both parties was in fact to create an interest in land, yet that very determination sealed the option agreement's fate as an interest in land because it then attracted the opera- tion of the rule. That is, by concluding that the option was intended by all parties to be an inter- est in land, the Court of Appeal guaran- teed that the intention of all parties would then be frustrated by the operation of the rule. In Ontario, the operation of the rule is governed by the Perpetuities Act, R.S.O. 1990, c. P .9. However, all this statute really does is modify the common law to fit the more progressive "wait-and-see" rule. At pure common law, the option agreement in Is- rael Estate would have been void ab ini- tio, simply because there was a possibility that the gravel would not be depleted by 2001. Under a wait-and-see modification of the rule, the option agreement was con- tingently valid until 2001 (21 years after the owner's life). However, it became void immediately after the vesting trigger (i.e., the depletion of gravel on the property) had not occurred. Most common law jurisdictions in Canada (indeed most of the common law world) adopt the wait-and-see variation of the rule. However, New Brunswick still uses the classic void ab initio common law rule, while Manitoba and Nova Scotia have abolished the rule altogether. Israel Estate reminds all practitioners that real estate law is more than just filling out forms and processing closings, and it can have devastating effects. There is very real substantive law behind every real es- tate transaction. Some of it is quite archaic in its nature and in its purpose, but, none- theless, it is still valid law. LT uJeffrey Lem is the director of titles for the province of Ontario. This article ref lects the personal views of the author alone. Bill 101 has major shortcomings BY GRAHAM KING E arlier this year, a private member's bill was introduced in the Legislative Assembly of Ontario for the purpose of amending the province's Business Corporations Act. The apparent aim of bill 101, Enhancing Shareholders Rights Act, 2017 is to provide shareholders with greater opportunities for engagement and control within the corporate apparatus and to "modernize" Ontario's corporate legislation. The proposed sweeping amend- ments relate primarily to in-vogue discussion topics on board diversity, majority voting requirements and "say on pay." However, while the bill is relatively short, its shortcomings are long. Initiating a shareholder proposal to nominate di- rectors under the act currently requires representa- tion from holders of at least five per cent of the shares of the corporation or five per cent of the class or series of shares entitled to vote at the meeting at which the proposal will be presented. Similarly, to requisition a meeting of shareholders, representation from holders of at least five per cent of the shares of the corporation is required. The bill proposes to reduce the five-per- cent thresholds to three per cent, thereby making it easier for shareholders to advance their interests in this regard. Those that are skeptical about non-strategic and un- disciplined shareholder activism may take issue with this change; what's the magic with three per cent? Some might argue that this provides activist shareholders with the ability to potentially extend their inf luence into the operations of the corporation — which prop- erly belongs with the board and management. This may extend activist shareholders' personal agendas rather than the best interests of the corpora- tion as a whole. The act also currently provides for a plurality voting regime in which shareholders can either vote in sup- port of a director nominee or withhold support — there is no "against" option. Under this regime, directors in uncontested elections can be elected to the board with a single vote in support, irrespective of the number of votes withheld. In addition, the act currently allows for director nominees to be elected as a slate and up to a maximum term of three years. The bill seeks to enhance shareholder democracy in director elections in three key ways. Firstly, the bill proposes a majority voting requirement for all corpo- rations covered under the act, which would require a nominee in an uncontested election to obtain majority support from shareholders. Secondly, the bill introduces a requirement that each director must be elected individually, effectively prohibiting slate voting. Thirdly, the bill proposes that directors only be permitted to be elected for a maxi- mum term of one year. While each of these three amendments has its is- sues, there is a concern that limiting terms to one year may limit the value and benefits of institutional knowl- edge that a long-serving director may contribute to a meaningful discussion. The bill proposes to require prescribed corporations to disclose to their shareholders at every annual meet- ing and prescribed information respecting diversity among the corporation's board and senior manage- ment. It is unclear whether the prescribed diversity disclosure will relate exclusively to gender or be more expansive to include additional categories of diversity — prescribed information is simply being left to the regulations. In addition, the bill provides shareholders with a de- finitive voice on executive compensation by permitting shareholders to make a proposal to adopt an executive compensation policy with respect to the remuneration of directors or officers or make a proposal to amend or repeal such a policy. Notably, directors of a corporation under the act will be obligated to comply with any ad- opted proposal. It proposes not only a binding vote on compensation policies but also the right to develop and propose such policies. The bill's proposed amendment on executive com- pensation marks a divergence from current practices of shareholder oversight of executive compensation, which has taken the form of a "say-on-pay" vote. Say on pay involves the corporation voluntarily proposing an advisory resolution at a meeting of shareholders to enable them to express approval or dissatisfaction with the remuneration of executives. Importantly, say-on-pay votes, while inf luential, are not formally binding on the board, as the board still maintains its discretion to not abide with the say-on- pay vote. The bill seeks to change this and give share- holders of corporations governed by the act the final say on pay with respect to matters of executive com- pensation. If adopted, this would fundamentally shift the responsibility and duties related to executive com- pensation packages and raise certain corporate gover- nance issues, especially as it is the duty of the directors, not the shareholders, to act in the best interests of the corporation (which may include directors developing compensation packages to retain necessary talent). This proposal may have the impact of limiting the di- rector's ability to exercise that duty. While the bill has passed second reading and has been referred to the Standing Committee on Finance and Economic Affairs for further study, the passing of the bill into law is not a certainty. Even if passed into law, the final form of the law may differ in material re- spects from the current draft of the bill. Perhaps one of the most puzzling aspects of the bill is that, unlike certain amendments recently made to our federal Business Corporations Act, the bill (or at least certain provisions) would apply to all corpora- tions covered by the act — both public and private. As Ontario private corporations are generally closely held, often having the same person or family acting as the shareholder, director, officer and employee, applica- tion and implications of the bill on private companies is entirely unclear and may be seen as a f lood of im- practical additional rules and regulations that may be better suited only for public corporations. LT uGraham King is a partner at Borden Ladner Gervais LLP and is the manager of BLG's Corporate & Commercial Group in Toronto. Joseph DiPonio is an associate in BLG's Securities and Capital Markets who assisted with this column. u SPEAKER'S CORNER COMMENT The Dirt Je rey W. Lem Je rey W. Lem

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