Despite the COVID-19 pandemic, shareholder activism is alive and well in Canada with respect to both board- and transaction-related proxy fights. Laurel Hill Advisory Group, in its 2020 Trends in Corporate Governance Report, reports that for the first nine months of 2020 there have been 10 board-related proxy fights, primarily in micro-cap mining companies, (consistent with 2019, but down from the high of 15 in 2018) with a minimum dissident win rate of 40% over the last four years. Also of note is the increasing use of the public broadcast exemption, as the dissidents in five of the ten board-related proxy fights relied on that exemption. In only one board-related proxy fight was a universal ballot used by management. According to the Laurel Hill report, there have been four formal proxy fights related to transactions in 2020 to date and another six that have received notable opposition by shareholders.
Shareholder activists have had some success in recent years in blocking transactions proposed by public issuers but have had little success in dissent proceedings in trying to establish that the fair value for such transactions is something greater than the negotiated deal value. It has also proven difficult to get Canadian courts or securities regulators to intervene in such transactions, apart from disclosure matters. While it is possible to pursue multiple routes of attack, the choice to do so, or the result in one forum, may have implications on the results in the other forum.
Court Intervention Relating to Plans of Arrangement
Most public M&A transactions in Canada are structured as plans of arrangement under applicable corporate statutes. In order for an arrangement to proceed, in addition to a shareholder vote, the court must determine that the transaction is fair and reasonable, which provides an opportunity for an activist to oppose the arrangement even if they are unable to secure enough votes to block shareholder approval of the arrangement. Canadian courts routinely approve arrangements (with most of the decisions being unopposed and without written reasons); however, Canadian courts have occasionally refused to approve an arrangement where shareholders opposed the arrangement, including in the recent decisions discussed below. Further, dissent proceedings in arrangement transactions have seen a recent increase, although with largely unsuccessful outcomes. As a result, the frequency of future dissent proceedings may decrease.
i) Attempts to Block Transactions at the Fairness Hearing
In InterOil Corporation v. Mulacek 2016 YKCA 14 the court refused to approve a US$2-billion acquisition of InterOil by Exxon. The court held that the vote in favour of 80% of InterOil shareholders could not be given weight because of disclosure deficiencies in the InterOil proxy circular that did not properly allow shareholders to assess value (both given up and received). The court also found that the corporate governance process carried out by InterOil was seriously flawed. Specifically, the court determined that InterOil should have obtained a fairness opinion from an independent financial advisor for a flat fee (unrelated to the completion of the arrangement) and the advisor’s analysis should have been disclosed in the proxy circular.
Following the failure to obtain court approval of the first arrangement, InterOil and Exxon entered into an amended and restated arrangement agreement, obtained a fairness opinion from an independent financial advisor for a flat fee, and distributed an amended and restated proxy circular rectifying many of the deficiencies previously identified by the court. The new arrangement was approved by shareholders (91%) and the court.
In July 2017, following InterOil, various provinces, including Ontario, adopted Multilateral CSA Staff Notice 61-302 (“Staff Notice 61-302”), which discusses the importance of process in material conflict of interest transactions. Although not directly applicable to many transactions, it sets out best practices for companies to follow to protect their transactions from a successful challenge by an activist. It emphasizes the importance of the timely establishment of a special committee with a broad mandate and detailed disclosure. With respect to fairness opinions, it emphasized the requirement to disclose compensation arrangements and how those arrangements impacted the board and special committee’s consideration of the fairness opinion and the need to disclose the financial advisor’s analysis. Similarly, in Sherritt International Corporation 2020 ONSC 5822, the court commented that fairness opinions that do not contain analysis are of no assistance to the courts. The court was also critical of the independence of the financial advisor, their specific experience and the question they were asked to opine on.
In Core Gold Inc. 2019 BCSC 1267, the court refused to approve an arrangement, and the key factor in the court’s decision was the failure of Core to obtain an independent fairness opinion, rather than one based on a success fee, particularly in the face of serious concerns raised by an opposing expert. The court relied on InterOil in making this determination. Subsequent to the InterOil decision, the practice in British Columbia is to have an independent fairness opinion, which often results in two fairness opinions, one from the main financial advisor for which the fees payable are typically contingent on the completion of the transaction, and a separate fairness opinion from an independent financial advisor paid a flat fee that is not contingent on the completion of the transaction. However, the practice in other jurisdictions, including Ontario, remains mixed.
Although many challenges to transactions relate to the process followed or the fair value which applies equally to all shareholders, on occasion there are challenges where the arrangement has a unique impact on a specific shareholder. In Bravio Technologies Ltd. 2019 BCSC 2135, the court refused to approve an arrangement where there was an ongoing dispute as to the ownership of certain shares and the arrangement offered no means of preserving the respondents’ rights with respect to the disputed shares.
In that case, rather than dismissing the petition, the court adjourned the proceedings to allow the parties to attempt to resolve their differences. Similarly, in iAnthus Capital Holdings Inc. 2020 BCSC 1442, while the court found that a plan of arrangement, which was an alternative to a filing under the Companies’ Creditors Arrangement Act, was generally fair and reasonable but for a release and injunction, the court declined to approve the arrangement but did not dismiss the petition so that the arrangement could be amended. The release was very broadly worded and included a release of historical securityholders and agents, and would result in a release of third-party rights and an injunction against those who had no notice of it. Notably, the court held that the marketing of the company may have been adversely affected by the COVID-19 pandemic, but the issue is what the company is worth today, not before or after the pandemic. In iAnthus Capital Holdings Inc. 2020 BCSC 1484, the court approved an amended arrangement that eliminated the injunction and narrowed the release so that it no longer barred claims of historical shareholders and no longer comprehensively protected historical shareholders, auditors and iAnthus’s agents generally. There was a carve-out of claims for gross negligence, fraud or willful misconduct. The court held that it was not relevant whether claims to be eliminated are ones that have already been advanced in an action or merely ones that could be (there were several outstanding related actions). In approving the amended arrangement, the court rejected that securityholder approval was required for the revised arrangement as present securityholders were in the same position.
Despite opposition, the courts continue to approve opposed arrangements. In Torstar Corporation and Nordstar Capital LP Plan of Arrangement 2020 ONSC 4574, the court approved an arrangement, despite a higher competing offer, noting that the company received legal and financial advice as to whether a competing offer could be considered a superior proposal under the arrangement agreement and concluded it could not in the face of hard lock-ups (which the court noted were private agreements and not subject to review by the court on the application). The company also had fairness opinions (one of which was obtained from a financial advisor retained on a fixed fee basis), which considered both the cash component plus the contingent value right. In approving the arrangement, the court rejected the argument that there had been inadequate disclosure and also noted the delay of the competing offer. In Torstar Corporation and Nordstar Capital LP 2020 ONSC 4679, the court refused to order a stay pending appeal. On the balance of convenience, the court noted the possible prejudice to the company in potentially losing the transaction.
ii) Applications to Obtain Relief before or after the Fairness Hearing
Shareholders have a very limited ability to intervene at the interim order stage, as confirmed in iAnthus Capital Holdings, Inc. 2020 BCSC 1383 where the court held that companies do not have to involve shareholders at the interim order stage and the failure to bring potential opposition to the arrangement to the attention of the court is not a breach of the obligation to make full disclosure. The court also refused a delay of one week for the final order hearing finding that the potential prejudice to the company was greater than that to the shareholder. The court did, however, order production of the documents underlying the fairness opinion, as well as documents relating to a special committee investigation which would be affected by the arrangement.
Similarly, shareholders have a very limited right to obtain relief (other than through dissent proceedings) following the closing of a transaction. In O’Leary Funds Management v. Boralex 2018 QCCS 842 affirmed 2019 QCCA 84,1 the unitholder brought an application for damages relating to the compulsory acquisition of shares pursuant to a trust agreement. The court had previously dismissed an application for a temporary order prior to the closing of the transaction challenging the transaction on several grounds including the voting threshold. In the subsequent proceedings, the court refused to incorporate protections that are afforded under corporate legislation which were not contained in the trust agreement.
iii) Dissent Proceedings
Despite an increase in dissent proceedings in recent years, shareholders have had limited success in convincing the court that the fair value of their shares was something different than the negotiated deal value. In Carlock v. ExxonMobil Canada Holdings Inc. 2019 YKSC 10, the court referred to the flawed process relating to the original arrangement in concluding the fair value of the InterOil shares was US$71.46 per share (based on a discounted cash flow analysis), instead of the negotiated deal value of US$49.98 per share. The Court of Appeal in Carlock v. ExxonMobil Canada Holdings Inc. 2020 YKCA 42 overturned that finding and held that it was an error for the lower court to have relied on a speculative discounted cash flow analysis in the face of reliable and objective evidence of fair value. The Court of Appeal noted the flaws in the original governance process had been rectified and found that the agreed transaction price was the fair value for dissent rights, including on the basis of, among other things, the extensive sales process undertaken by InterOil, which yielded Exxon’s bid.
The BC Court of Appeal reached a similar conclusion in Bamrah v. Waterton Precious Metals Bid Corp. 2020 BCCA 122,3 upholding the decision of the lower court that the negotiated transaction value of $0.61 per share represented the fair value, and rejecting the appellants’ expert evidence that the shares were to be valued at US$1.60–1.85 per share. The Court of Appeal held that the lower court correctly used the negotiated deal price as a starting point and then referred to other market-based factors to determine fair value including: the history of the acquiring and target company, the trading price of the shares in the public market, the evolution and formulation of the plan of arrangement, and the opinions regarding value of the expert witnesses.
There have been other decisions (predating the above) relating to dissent proceedings in which courts awarded substantially more than the negotiated deal price. In Fibrek 2019 QCCS 4003, the court determined the fair value of Fibrek’s shares was $1.99 per share, despite that the negotiated deal value for the cash only option was $1.00 per share. Similarly, in DeMarco v. Imperial Ginseng Products Ltd. 2019 BCSC 1860, the court set the fair value at above the agreed transaction value of $0.50 per share in cash or shares, setting the value at $4.16 per share, but still well below the value of $17.64 asserted in the expert evidence of the dissenting shareholders. Given that the InterOil and Bamrah decisions are more recent and appellate level, they are likely to receive more weight by Canadian courts going forward.
Other Court Applications Relating to Proxy Fights
Applications to the court relying on either the oppression remedy or the broad statutory provisions that afford courts in Canada significant discretion with respect to shareholder meetings are common during proxy fights.
Although activists have had some success in getting Canadian courts to intervene in an activist campaign, it is generally difficult to do so (in part because of the deference paid to boards under the business judgment rule). In Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp. 2017 BCSC 664, the court dismissed an oppression petition finding that it was entirely reasonable for the board to issue shares to certain shareholders issuable under certain convertible promissory notes before the record date of a requisitioned shareholder meeting to ensure the shareholders of the new shares could participate in the vote to replace the board. Further, there was no evidence that the conversion was not in the company’s best interests and the decision of the board to convert the notes to shares was a legitimate business decision. A similar result occurred in Jaguar Financial Corp. v. Alternative Earth Resources Inc. 2016 BCCA 193 where the court held that the company had not acted oppressively in requesting an extension of time to hold its annual general meeting where shareholders were trying to block a transaction. In BullRun Capital Inc. v. GrowMax Resources Corp. 2019 ABQB 107, while the court accepted that it was a reasonable expectation of shareholders to be treated fairly and permitted to exercise their statutory rights during a proxy fight, the court ultimately found that there was no oppression on the part of the company acting in accordance with statute and taking various actions commonly taken by companies, such as rejecting a requisition three weeks after receiving the requisition, calling a meeting prior to rejecting the requisition, adopting an advance notice policy without shareholder approval, announcing a transaction at an opportune time, and soliciting proxies after the deadline without announcing such a waiver. The court did, however, appoint an independent chair for the meeting. The court also confirmed that advance notice bylaws are proper if introduced to ensure that shareholders have sufficient notice of a contested election of directors and not as a tool by management or the current board to entrench themselves (which is consistent with guidance provided by the Toronto Stock Exchange [“TSX”] and leading proxy advisory firms with respect to the appropriate use of advance notice bylaws).
While there is now a widespread use of advance notice bylaws, which require that a dissident seeking to elect nominee directors provides advance notice of its nomination to the company in accordance with such bylaws, those companies that do not have such bylaws in place should consider their implementation, particularly in light of the decision in Russell v. Synex International Inc. 2019 BCSC 34, where the court held that proxies that had been voted from the floor in favour of directors not named in a circular were valid proxies. The court reiterated the presumption of giving effect to proxies so as not to disenfranchise shareholders’ votes.
Canadian courts are most likely to intervene if there has been a breach of disclosure requirements, as such decisions are not entitled to the business judgement rule. In Gupta v. East Asia Minerals Corporation 2018 BCSC 214 the court granted a brief adjournment of five days of an annual general meeting (“AGM”) to allow appropriate communications to be distributed to shareholders. The court acknowledged the well-established authority that it will not lightly interfere with a properly called shareholder meeting. The court also found that a significant number of shareholders would be disenfranchised without a brief adjournment and it was unreasonable to post a supplemental circular 17 hours before the proxy deadline.
While applications are normally brought before or shortly after a shareholder meeting, on occasion they are brought significantly after the meeting. These applications are unlikely to have much success, as at that point the decision will largely be moot, as was the case in Karnalyte Resources Inc. v. Phinney 2020 ABQB 119, where the court dismissed an application for orders relating to the company’s 2018 AGM which sought declarations that the dissidents improperly solicited proxies. The court noted that even if an illegal proxy solicitation had occurred, it was unsuccessful to prevent the election of the management slate.
Applications To Regulators Relating To Proxy Fights Or Takeover Bids
Another avenue often pursued in a battle for control of an issuer is making a complaint to an exchange, a hearing and review from a decision of an exchange, or a complaint or application made directly to a securities commission. It can be very difficult to successfully pursue such an application, absent a breach of disclosure obligations, and in the latter case the most common outcome is additional or revised disclosure. These applications can be made during a proxy fight or a hostile takeover bid.
In March 2020, significant amendments were made to the BC Securities Act, which now allows a person who is a shareholder of a company whose shares are the subject of a proxy solicitation (in addition to a takeover bid) to make an application for relief.4 It also expanded the orders that the BC Securities Commission (“BCSC”) can make including to rescind a transaction and restrain voting rights.
If applications are made to a securities commission, other than by way of hearing and review, the applicant will need to address whether they have standing. In both Pearson 2018 ONSEC 53 and Catalyst Capital Group Inc. 2016 ONSEC 14, the Ontario Securities Commission (“OSC”) refused to grant standing where applications were made late in the process.
In the much publicized fight over the privatization of Hudson’s Bay Co. (Catalyst Capital Group Inc. 2020 ONSEC 6), the OSC granted standing where the application: was brought shortly after the proxy circular was distributed; related to both past and possible future conduct; sought forward-looking relief within the jurisdiction of the OSC; was not enforcement in nature; and was brought by a minority shareholder.
The OSC held that although a special committee was not required, where one was established, the special committee should comply with the disclosure mandated by Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). If a company has embarked on a special committee process, investors are entitled to disclosure concerning the mandate, timing, and material decisions made by or relating to the special committee. Investors need disclosure concerning decisions related to the special committee’s power to negotiate or supervise the negotiation of transactions and to consider alternatives. The circular should also describe its approach to the use of independent counsel and its possession of sufficient resources to carry out its mandate, free of undue influence. The OSC also referenced Staff Notice 61-302 in its discussion of the timely establishment of a special committee. Ultimately, the OSC did not cease trade the privatization proposal and instead ordered additional disclosure.
Similarly, in Aurora Cannabis 2018 ONSEC 10, the OSC also ordered additional disclosure. In that decision, the OSC also commented upon the then relatively new Canadian takeover bid regime, including holding that the Aurora offer was not exempt from the 105-day minimum deposit period, given the rebalancing that occurred with the extension from the previous 35-day period and cease traded the tactical rights plan. The OSC also considered whether certain parties were acting jointly or in concert, which is to be determined by whether they were acting together to bring about a planned result. The OSC recognized that lock-up agreements are an established and legitimate practice but that locked-up shareholders may be a joint actor with a bidder where cooperation goes beyond seeking to maximize price and liquidity.
Not all applications for better disclosure will result in success, as the BCSC in Core Gold Inc. 2020 BCSECCOM 50 noted; there are often allegations of inadequate disclosure during a takeover bid. An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote or whether to tender their shares. In the course of the bid (which was made following the court’s refusal to approve the arrangement), the BCSC dismissed an application for an order for better disclosure and to extend the bid deadline, finding that the disclosure (although not perfect) was not deficient.
Following the amendments to the takeover-bid regime, there have been very few applications to cease trade a rights plan and instead there has been an increase in disputes over private placements. Where applications are made by way of a hearing and review from a decision of an exchange, significant deference is often paid to the exchange.
In Chilean Metals Inc. 2019 BCSECCOM 24 the BCSC upheld the decision of the TSX Venture Exchange (“TSXV”) to refuse to approve two private placements. Although allegations were made that the private placements were defensive tactics, the BCSC found that the TSXV primarily refused to approve them because of a failure to comply with exchange policies. In Hemostemix 2017 ABASC 14 the Alberta Securities Commission (“ASC”) upheld a decision of the TSXV approving a private placement without shareholder approval. The ASC found that the TSXV correctly analyzed applicable rules and the financing was relatively modest with a demonstrated need. Further, the ASC found that although there was an active proxy contest, the record date had passed, so no shares issued in the private placement could impact the vote at the shareholder meeting.
In Eco Oro Minerals Corp. 2017 ONSEC 23, the OSC effectively reversed a transaction that occurred during a proxy fight to replace the board on a hearing and review from a decision of the TSX approving a private placement. The OSC made an order requiring shareholder approval and reversing the transaction if shareholder approval was not obtained and restraining voting rights related to the shares issued in the private placement. The OSC determined that it had the jurisdiction to make the orders despite the Ontario Securities Act only providing these powers to the court, as the OSC held that such powers were available to it on a hearing and review from a decision of the TSX. As noted above, the Securities Act in BC has now been expressly amended to provide these powers to the BCSC, in addition to the court.
In Hecla Mining 2016 BCSECCOM 359 (in a joint hearing with the OSC) the commissions dismissed an application to cease trade a private placement in the face of bid. However, the OSC cease traded the offer until a formal valuation was obtained in accordance with MI 61-101.
Other types of applications can also be made where it is alleged that there has been a breach of the public interest. In PointNorth Capital Inc. 2017 ABASC 121 the ASC declined to exercise its public interest jurisdiction to prohibit soliciting dealer fees. The ASC held that securities laws set out comprehensive and detailed requirements for proxy solicitation and for the conduct of brokers. Soliciting dealer arrangements were not prohibited under such rules. Subsequently, in May 2019, the Investment Industry Regulatory Organization of Canada (“IIROC”) published IIROC Notice 19-0092 Managing Conflicts of Interest from Soliciting Dealer Arrangements, that effectively prohibits such fees in contested director elections. In other situations, like a vote on a transaction, the dealer must consider any conflicts of interest that arise. Disclosure of the conflict is not satisfactory; the dealer must address how the conflict has been addressed in the client’s best interests.
In Transat AT Inc. v. Group Mach Acquisition Inc. 2019 QCTMF 44 the Financial Markets Administrative Tribunal (“AMF”) issued a cease trade order over a mini-tender for 19.5% of the shares of Air Transat in an effort to defeat a plan of arrangement under which Air Canada would acquire Air Transat. The AMF found that the mini-tender was abusive for a number of reasons including that there was an insufficient time period in which to respond to the offer (11 days), proxies could be obtained for more than the maximum of 19.5%, which could be taken up under the offer, and the disclosure was confusing in light of the short time frame. Nevertheless, the decision signals that in other circumstances, the use of a mini-tender may be appropriate.
Multiple Routes of Attack
Multiple avenues of attack are generally permissible, although, the choice do so or the result in one forum may have implications in another forum.
Although the same facts were involved, and effectively the same relief sought, in both oppression proceedings before the court in BC and before the OSC in Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp. 2017 BCCA 224, the court held that both avenues were open to the shareholders. The two proceedings were based on different statutes having different objectives. The Eco Oro decision was followed in Imex Systems Inc. 2019 BCSECCOM 23 where oppression proceedings were brought before the courts in Ontario and there was a hearing and review of the decision of the TSXV before the BCSC. In PointNorth the ASC was satisfied that there were securities law issues that could properly engage the public interest jurisdiction despite allegations of a breach of fiduciary duty and oppression. These decisions may support bringing a multiplicity of proceedings before both the courts and securities commissions. However, multiple paths may have some relevance in subsequent proceedings. In O’Leary, the court noted that while findings made by the provincial securities regulator were not binding, nor was the prior court decision as it was at an interlocutory stage, they may be relevant. The court noted that the unitholder had not made complaints about misleading disclosure before the securities regulator previously. Similarly, in Karnalyte the court noted that the issuer had made a complaint to the ASC who took no action. In Pearson, the OSC noted that the proper forum for the complaints was the fairness hearing.
While there is authority for applications before both the regulators and the courts, the chances of success at forum shopping among provincial regulators is less likely to occur as demonstrated in Mangrove Partners 2019 ONSEC 18. In that decision the OSC declined to exercise jurisdiction in favour of the ASC, who was the principal regulator of TransAlta Corporation, whose shares were sought to be cease traded, pending the satisfaction of certain conditions including a vote of the TransAlta shareholders, postponement of a share-holder meeting, additional disclosure, and the release from voting commitments.
Shareholders continue to be active in Canada, pursuing actions against issuers and their boards in various forums. As a common theme, the cases discussed above demonstrate the importance of process undertaken by issuers and their boards in any dealings with shareholders.5 Accordingly, the ability to establish that a robust and thorough process has been undertaken will be critical to the success of any issuer and its board in defending themselves against allegations that they have treated shareholders unfairly, whether when assessing if a transaction is fair and reasonable or when defending against oppression allegations or in a challenge before a securities regulator.
- The application for leave to appeal was dismissed: O’Leary Funds Management v. Boralex 2019 CanLII 64831.
- The application for leave to appeal was dismissed: Carlock v. ExxonMobil Canada Holdings Inc. 2020 CanLII 55864.
- The application for leave to appeal was dismissed: Bamrah v. Waterton Precious Metals Bid Corp. 2020 CanLII 68948.
- Section 92 definition of “interested person” and section 114.
- The discussion in Staff Notice 61-302 sets out recommended best practices in this regard.