Ontario Courts Provide Guidance on Proxy Contest Issues
|Area||Corporate Finance and Securities|
Two recent Ontario Superior Court decisions provide important guidance on key issues commonly arising in proxy contests. In addition to the specific guidance provided, the decisions indicate that:
- Ontario courts are taking a practical, purposive approach to the interpretation of the statutory rules governing proxy contests; and
- dissident shareholders must discharge a significant burden to challenge actions taken by corporations in responding to dissident activity.
Additionally, the two decisions are themselves indicative of a trend of increased incidence of shareholder activism, and the use of the courts to resolve disputes arising from shareholder activist activity.
Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc.
The key issue in Equity Financial was whether a press release issued by Equity Financial Holdings Inc. constituted an illegal solicitation of proxies. This issue often arises in proxy contests because “solicitation” is defined very broadly, and corporate legislation contains detailed rules concerning solicitations.
Smoothwater Capital Partners LP I, a shareholder of Equity Financial, requisitioned a meeting and then issued press releases criticizing Equity Financial’s board. Equity Financial responded with a press release defending its board’s historical actions and criticizing Smoothwater for initiating a costly and unnecessary proxy fight before any meaningful conversation with Equity Financial or its board had taken place.
Smoothwater alleged that Equity Financial’s press release was an improper solicitation because it was (in the language of the Canada Business Corporations Act) a communication “calculated to result in the procurement or withholding of a proxy” completed without the company having previously filed a management information circular for the meeting.
The Court concluded that the company’s press release did not constitute a “solicitation,” in view of its nature and the circumstances of its release. Notably, the Court appeared to distinguish communications by shareholders from communications by corporations, on the basis that, unlike shareholders, corporations have a “corporate position to defend,” and could not use statutory exemptions available only to shareholders to shelter their communications.
The Court noted that Equity Financial’s release did not refer to any specific intention to solicit and looked favourably on the fact that the release stated that an information circular would be provided. Because the Court concluded there was no solicitation, it unfortunately did not address whether a solicitation by a corporation is “cured” by a subsequent filing of a management information circular.
Concept Capital Management Ltd. v. Oremex Silver Inc.
The facts in the dispute between Oremex Silver Inc. and its shareholder, Concept Capital Management Ltd. (CCM), are complex and unique. The case addresses a corporation’s latitude to respond to, and defend itself against, the result sought at a requisitioned meeting.
CCM sent a requisition for a shareholder meeting on September 26, 2013, and publicly disclosed the requisition on September 27, 2013. The requisition was not received by Oremex until September 30, 2013. The Oremex board called an annual and special meeting on September 27, 2013, the date of CCM’s press release, with a record date of October 25, 2013. On November 7, 2013, Oremex announced that the meeting would be postponed to December 31, 2013, with a record date of November 29, 2013. Despite the meeting postponement, CCM and other dissident shareholders held a meeting on November 26, 2013, where the participating shareholders (more than had participated at the prior Oremex shareholder meeting) voted to replace the board.
Through the same period, Oremex was in discussions with a potential investor, Global Resources Investment Trust Plc (GRIT), concerning a financing transaction. Under the financing transaction, GRIT would subscribe for units (shares and warrants) issued by Oremex in exchange for shares of GRIT (which Oremex would monetize for needed funds through the London Stock Exchange). The GRIT financing closed on November 29, 2013 (the record date for the postponed meeting). However, since the required regulatory approvals had not been obtained, the Oremex shares and warrants were issued into escrow, and GRIT issued subscription receipts (exchangeable by Oremex for shares in GRIT on satisfaction of the transaction conditions).
CCM and the dissident shareholders argued that because the meeting was called in response to the CCM requisition, Oremex’s rescheduling was improper and the outcome of the November meeting should be confirmed. Alternatively, they alleged that the rescheduled meeting should proceed with an independent chairman and with a record date before the GRIT closing date so that the shareholders would not be diluted by the shares issued to GRIT.
The Court held that Oremex was justified in not calling the requisitioned meeting. The Court found that the originally scheduled meeting had not been called in response to CCM’s requisition. The company had been arranging to convene a shareholder meeting before it received the requisition, and committed to do so in correspondence with the TSX Venture Exchange. Significantly, the Court concluded that the company could rely on an exemption from the statutory obligation to call a meeting in response to a requisition. While the company had not yet fully complied with the exemption requirements, the Court considered the purpose of the exemption; that there is no need to call a meeting when one is already being convened.
Having determined that Oremex’s actions to convene a meeting in November excused it from any obligation to respond to CCM’s requisition, the Court considered whether the company could postpone that meeting. The Court stated that directors have the authority to postpone a shareholder meeting (including a requisitioned meeting), though the actions of the board are subject to scrutiny and should be overturned where the directors acted for an improper purpose or in bad faith. Despite the natural inference that the postponement was motivated to permit the issuance to GRIT, and the Court’s finding that the directors’ stated reason for the postponement was “weak,” the Court found that there was insufficient evidence to hold that the Oremex board improperly postponed the meeting.
However, the Court concluded that the purpose of the escrowed closing of the GRIT financing was to dilute the dissident shareholders’ voting power at the shareholder meeting, and granted the shareholders’ request to re-set the record date to before the issuance to GRIT. The Court was influenced by the fact that: (i) the transaction was structured differently than all of GRIT’s similar financings, (ii) the documentation did not contemplate any escrow or subscription receipts, and (iii) the structure cast doubt on whether the Oremex shares had been properly issued. In the circumstances, the implication was that the closing was intended to dilute the dissident shareholders.
With increasing shareholder activism, the incidence of litigation involving proxy contests appears to be on the rise. These two cases, in addition to addressing commonly arising issues (i.e., solicitation and the rules for convening and rescheduling meetings), more generally reflect the courts’ practical, purposive approach to statutory rules governing proxy contests; focusing on the law’s intention rather than its literal requirements. It also appears that courts will give companies some leeway in responding to dissident activity, disturbing corporations’ responses only where there is very clear evidence of an improper purpose or bad faith.
For further information on these decisions, please contact any member of our Corporate Securities Group.