Prompt, robust and wide dissemination of material information is a central tenet of Canadian securities laws. The early warning disclosure requirements contained in National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”) and National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (“NI 62-103”) ensure that the market is advised of significant accumulations of securities that may influence the control of a reporting issuer. In NorthWest Copper Corp., 2023 BCSECCOM 602 (“NorthWest”), the British Columbia Securities Commission (the “Commission”) provided guidance on the application of the early warning system in the context of proxy solicitations and considered circumstances in which two or more shareholders may be acting jointly or in concert.
As a result of this new guidance, issuers and shareholders should consider the following key takeaways with respect to compliance with the early warning rules in NI 62-104 and NI 62-103:
- Proxy Solicitation Application: The early warning system and joint actor rules apply in the context of proxy solicitations, despite their origins in, and ongoing relevance to, the take-over bid and issuer bid rules.
- Acquisition Trigger: If parties are acting jointly or in concert, the early warning requirements are triggered when a joint actor makes an acquisition that results in the joint actors collectively holding 10% or more of the outstanding securities of an issuer (and are not triggered merely as a result of the parties beginning to act jointly or in concert).
- High Bar: The bar for finding that parties are acting jointly or in concert is set relatively high. A formal agreement, commitment or understanding is not required to find that parties are joint actors under the presumptive provisions of NI 62-104, however, the parties must be actively working together to achieve a joint specific purpose and not simply aligned in interest. The onus is on the complaining party to demonstrate that this high bar has been met.
- Clear, Convincing and Cogent Evidence: Shareholders can communicate with each other. The free flow of information and opinion among shareholders of a public company is important and will not necessarily rise to the level of acting jointly or in concert. Regulators will be careful not to create a climate that stifles discussion among shareholders and are reluctant to draw inferences from circumstantial evidence where there are reasonable alternative explanations for such evidence. Clear, convincing and cogent evidence is required to establish that parties are acting jointly or in concert.
- Proportionate Remedies: Where parties are found to have breached securities legislation (including early warning rules), regulators will not impose draconian remedies with the effect of disenfranchising shareholders, such as preventing offending shareholders from voting on the election of directors. The recent unsuccessful attempts by certain issuers and their advisors to “weaponize” complaints of joint action in proxy contests is not something that will likely be tolerated.
Purpose of Early Warning Requirements
As a general rule, early warning disclosure must be made when a person or company acquires beneficial ownership of, or control or direction over, 10% or more of the outstanding securities of a class of voting or equity securities (or securities convertible into such securities) of an issuer, and every increase or decrease of 2% or more thereafter. For purposes of the early warning rules, the acquiror’s securities include securities of an issuer beneficially owned, or over which control or direction is exercised, by any person acting jointly or in concert with the acquiror. The Canadian Securities Administrators (CSA) have suggested that the disclosure of information regarding significant accumulations of securities is important because:
- the securities acquired can be voted or sold, and the accumulation may signal that a take-over bid for the issuer is imminent;
- accumulations may be material information to the market even when not made to change or influence control of the issuer;
- significant accumulations of securities may affect investment decisions as they may effectively reduce the public float, which limits liquidity and may increase price volatility of the stock;
- market participants may be concerned about who has the ability to vote significant blocks, which can affect the outcome of control transactions, the constitution of the issuer's board of directors and the approval of significant proposals or transactions; and
- the mere identity and presence of an institutional shareholder may be material to some investors.
Background and Key Facts
In NorthWest, the Commission considered the actions of NorthWest Copper Corp. (“NWST”) and three shareholders, Grant Sawiak (“Sawiak”), Anthony Ianno (“Ianno”) and John Kimmel (“Kimmel”), who held approximately 0.4%, 3.9% and 8.2% of NWST’s issued and outstanding common shares, respectively. Below is a high-level summary of the key developments before NWST’s 2023 annual general meeting that informed the Commission’s decision:
- Late 2022: Ianno and NWST’s management discussed mutual concern over the distraction of certain directors of NWST by their other business activities.
- April 2023: Sawiak discussed concerns about NWST’s management with Ianno. Ianno approached Kimmel and raised the possibility of replacing one or two incumbent directors on NWST’s board. Kimmel had also become dissatisfied with NWST’s performance and management, and expressed interest in having a representative on the board.
- May 2023: Kimmel learned from Ianno that a potential dissident slate was being assembled and there was an opportunity for Kimmel to have a representative on the board. This is the first time Kimmel became aware of any potential dissident state.
- June 2023: Following a request made by Sawiak to Kimmel’s counsel, Kimmel agreed to contribute to the costs of a pending proxy fight. According to Kimmel, he agreed to do so to keep his options open and to protect his position in NWST. Beyond agreeing to contribute costs and proposing his counsel as a potential dissident nominee, Kimmel had no other involvement in Sawiak’s proxy solicitation.
- July/August 2023: Kimmel and NWST negotiated a potential deal to obtain Kimmel’s support for himself and NWST’s incumbent board. Upon learning that Kimmel had contributed to the costs of Sawiak’s proxy solicitation, NWST abruptly terminated negotiations with Kimmel.
- August 2023: Sawiak contacted Kimmel directly for the first time and solicited his support for the dissident slate.
NWST brought a complaint to the Commission, alleging that Sawiak sought to gain an undue advantage in the proxy fight by withholding information from the market and, specifically, that Sawiak was acting jointly or in concert with others whose NWST shareholdings, together with Sawiak’s own, met the 10% threshold.
Application of the Early Warning System to Proxy Solicitation
The Commission concluded that the early warning requirements apply in the context of proxy solicitations for the purpose of voting on an alternate slate of directors. The Commission rejected the argument that joint actor relationships are limited to take-over bid or issuer bid contexts, notwithstanding the concept only appears in section 98 of the Securities Act (British Columbia), which deals with take-over bids and issuer bids, and is not included in the proxy solicitation rules set forth in National Instrument 51-102 – Continuous Disclosure Obligations.
The Commission considered previous statements by the CSA that the early warning system seeks to give shareholders insight into not only potential bids but proxy-related matters and concerted plans to change a company’s board and the principle that securities regulation should be given a liberal interpretation.
Acquisition Trigger for Joint Actors under the Early Warning Regime
The Commission rejected NWST’s argument that the early warning disclosure requirements are triggered when an acquiror meets the 10% ownership threshold, whether through a “fresh acquisition” or as a result of becoming a joint actor with other shareholders. The Commission concluded that absent an acquisition, the early warning requirements contained in NI 62-104 do not apply, and “to hold otherwise would be to read out altogether the reference to an acquisition [in section 5.2 of NI 62-104]”. The interpretation may result in joint action falling outside the scope of the early warning requirements but the Commission concluded that such result is “neither an absurd consequence nor a sufficient basis to reject the plain meaning of the provision”.
Acting Jointly or In Concert Requires a Joint Specific Purpose
Persons that have an agreement, commitment, or understanding to exercise voting rights attached to securities are presumed under NI 62-104 to be acting jointly or in concert under Canadian securities laws. Where the circumstances do not fall within the presumption, it is a question of fact whether shareholders are acting jointly or in concert. NWST contended that the respondents were acting jointly or in concert on the basis that there was an understanding between them that they would vote for the dissent slate of directors and, even absent such understanding, the facts establish that the respondents were joint actors. NWST asserted:
- Ianno acted as the instigator of the proxy contest and as the liaison between NWST and Sawiak and between Sawiak and other shareholders, including Kimmel;
- Ianno claimed to control a significant and increasing number of NWST shares and threatened a proxy fight;
- Kimmel and Ianno had a long standing relationship;
- it was not credible that Kimmel would have agreed to contribute to the Sawiak solicitation costs if he had not also intended to vote in favour of the dissident slate; and
- Kimmel and Ianno spoke to other NWST shareholders regarding director nominees.
In finding Kimmel was not a joint actor, the Commission highlighted that:
- Kimmel pursued all opportunities to be represented on the board, regardless of the source of such opportunities (including by negotiating with NWST and the incumbent slate);
- the other respondents had no actual authority to speak for Kimmel and Kimmel was neither aware nor privy to conversations between the other respondents and NWST management;
- Kimmel’s relationship with Ianno was limited to casual conversations from time to time regarding their respective investment portfolios;
- merely discussing concerns about NWST’s board and management with the other respondents does not constitute a plan of action or a commitment to pursue it;
- other than proposing his counsel as a nominee for a board seat, Kimmel was not involved in selecting any of the proposed directors on the dissident slate;
- Kimmel communicated to NWST he was not part of a group, but was simply protecting his own interests; and
- Kimmel negotiated terms to account for the risk the dissident slate may win, which would leave him with a substantial share position without representation.
NWST failed to demonstrate on a balance of probabilities that the respondents actively worked together to achieve a joint specific purpose, and were not simply aligned in interest. NWST’s evidence was largely circumstantial and regulators will be reluctant to draw inferences from this type of evidence where there are reasonable alternative explanations. Further, the Commission rejected NWST’s assertion that the only reasonable rationale for Kimmel’s monetary contribution to Sawiak’s solicitation was his intention to vote for the dissident slate, reiterating Kimmel’s evidence that he did so to keep his options open and noting the amount spent was of no particular consequence to him.
The Commission made clear the importance of fostering a regulatory environment in which shareholders may engage in discussion and share information, noting “the bar for finding that parties are acting jointly or in concert is appropriately set relatively high” and that while “disclosure of shareholder blocks is important, […] so is the free flow of information and opinion among shareholders of a public company”. The decision notes “it is better to insist on sufficiently clear, convincing and cogent evidence that parties are acting jointly or in concert and take the risk that by doing so, some groups will fly under the radar, than to allow reliance on speculation to create a climate that stifles discussion among shareholders”.
Remedies for Breaches of Securities Legislation Should be Proportionate to the Circumstances and Objectives of the Order
NWST sought to have the respondents comply with the early warning requirements, prohibited from voting on the upcoming election of directors and restricted from trading their NWST shares for six months.
While the determination of an appropriate remedy was not necessary in the circumstances, the Commission took the opportunity to reiterate the objectives of an order where a breach of securities legislation is found. In particular, the Commission called the remedies sought by NWST draconian and clarified that orders are “preventative and prospective, not punitive or remedial, and must be proportionate to the circumstances of the case and the objective of such orders: to protect investors from unfair, improper or fraudulent practices and maintain fair and efficient capital markets”. With respect to the voting prohibition specifically, the Commission stated “the rights of shareholders to elect directors is of critical importance” and that disenfranchisement of shareholders should not be favoured over improved disclosure if the latter solves the problem.
For further information, please contact any member of our Capital Markets Group.
Capital MarketsBill Gorman and Randy McAuley co-authored Access Model for prospectuses: Final amendments announced in Law360 Canada. Excerpt from Access Model for prospectuses: Final amendments…
REITS and Income SecuritiesStephen Pincus, Brenda Gosselin, and Bill Gorman have co-authored The Benefits of Canada - Cross Border and Foreign REITs in the forth edition of The Legal Reviews Canada.To…
British Columbia Securities Commission Provides Guidance on Early Warning and Joint Actor Rules in Proxy SolicitationsPrompt, robust and wide dissemination of material information is a central tenet of Canadian securities laws. The early warning disclosure requirements contained in National Instrument…
Capital MarketsMichelle Vigod, Julian Di Bartolomeo and Duncan Lurie published an article in Law360 Canada, part of LexisNexis Canada Inc.Excerpt from "Proxy advisors update Canadian voting guidelines for…
Capital MarketsOn January 11, 2024, the Canadian Securities Administrators (CSA) published the final form of amendments to securities legislation to implement an access model (the “Access Model”) for delivery of…
Capital MarketsThe Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Act”) came into force on January 1, 2024, implementing enhanced reporting requirements for certain companies and…
Mergers and AcquisitionsGoodmans LLP is acting for Screaming Eagle Acquisition Corp. in connection with its proposed merger with the Studio Business of Lionsgate Entertainment Corp., comprised of its Television Studio and…
Capital MarketsGoodmans LLP acted for the underwriters in connection with a public offering by StorageVault Canada Inc. (“StorageVault”) of convertible senior unsecured debentures (the “Debentures”) on a bought deal…
Capital MarketsGoodmans LLP acted for E Automotive Inc. d/b/a EINC in its non-brokered private placement offering of 4,814,100 common shares ("Shares') to Intercap Equity Inc. at a price of C$4.23 per Share for…
Capital MarketsGoodmans LLP acted for Northwest Healthcare Properties Real Estate Investment Trust (the "REIT") in connection with the renewal of its existing base shelf prospectus and filing and obtaining a receipt…
Capital MarketsGoodmans LLP acted for Northwest Healthcare Properties Real Estate Investment Trust (the "REIT") in connection with a public offering whereby the REIT sold C$135 million aggregate principal amount of…
Capital MarketsGoodmans LLP acted for the syndicate of agents led by CIBC World Markets Inc., in connection with a public offering of C$1 billion aggregate principal amount of medium-term notes of Brookfield…
News & Events
Banking and Financial ServicesWe are proud to announce Goodmans LLP has once again received top-tier recognition from Chambers and Partners in the Chambers Global 2024 Guide released today. Recognition from…
Banking and Financial ServicesWe are pleased to share Goodmans lawyers have been recognized across Who's Who Legal's National Guide: Canada 2023. WWL National Guides identify national or regional leaders in a sector, industry…
Banking and Financial ServicesWe are pleased to announce Goodmans LLP has once again received top tier recognition from The Legal 500 Canada in their 2024 Guide released today. Recognition from The Legal 500 is based on…