The following post on the Canadian Appeals Monitor blog may be of interest to readers of this blog: Pay Me Now: Court of Appeal Delivers Lessons on fiduciary duties, the business judgment rule, and executive compensation
The business judgment of directors setting executive compensation was front and centre in the Ontario Court of Appeal’s recent decision in Unique Broadband Systems, Inc. (Re), 2014 ONCA 538 (UBS). Although the decision is based on unique underlying facts, it offers several important lessons on corporate governance.
Summary of Facts
In UBS, the Court of Appeal considered a trial decision in which Mesbur J. had found that Gerald McGoey, the former CEO and a director of UBS, had breached his fiduciary duties to the corporation and therefore deprived Mr. McGoey of certain compensation, indemnification for his legal and other professional services expenses, and severance payments. Read More.
As we described in a previous blog post, the Ontario Court released a decision in March (Champion Iron Mines Limited) in which it held that a fairness opinion that does not disclose the analysis underlying the opinion was inadmissible as evidence before the Court on an application to approve a plan of arrangement. The decision of Justice David M. Brown suggested that companies might need to bolster their disclosure of fairness opinions in order for an Ontario Court to take the opinion into account in a fairness hearing for a plan of arrangement.
The debate about so-called “golden leash” arrangements has picked up again. The Council of Institutional Investors (“CII”), an influential association of institutional investors, recently wrote a letter to the U.S. Securities and Exchange Commission (“SEC”) expressing its concerns regarding the transparency of compensation paid in “golden leash” arrangements.
As discussed in our previous post, “golden leash” arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of a target corporation. In January, 2014, Institutional Shareholder Services Inc. provided its views on by-laws designed to prohibit “golden leash” arrangements but did not specifically express any concerns about the appropriateness of such compensation for nominee directors provided the arrangements are disclosed (see our post).
The recent outcome of the Augusta/HudBay poison pill hearing provides some insight into how a shareholder rights plan may withstand scrutiny from a Canadian securities regulator for an extended period of time in the right circumstances. Though perhaps the result of somewhat unique facts, including insufficient initial support for the price being offered by the bidder and an active process being conducted by the target company, the British Columbia Securities Commission’s decision in Augusta/HudBay is also of interest in the context of the ongoing debates sparked by the proposed National Instrument 62-105 on Security Holder Rights Plans.
The following article by Graham P.C. Gow, Jonathan Grant, Andrew Parker and Matthew Cumming may be of interest to readers of this blog:
Fairness Opinions – Important Ontario Court Comment
In almost every Canadian M&A transaction, the board of directors of the target company, and often also the acquiring company, will expect their financial advisors to provide a fairness opinion to the effect that the price in the proposed transaction is fair to the company and its shareholders from a financial perspective. These opinions are not legally required, but they are commonly used by boards as evidence that the directors have met their duties in approving the transaction. Read more.
If your organization is currently thinking about establishing or acquiring a business in Canada, the newest edition of Doing Business in Canada, written by McCarthy Tétrault, will prove to be a valuable resource. The guide provides a broad overview of the legal considerations that non-residents should take into account to help ensure their success as they enter into a business venture in Canada. Each section offers timely information and insightful commentary on different areas of law.
The book includes a chapter on corporate finance and mergers & acquisitions, with sections on:
After downloading the interactive PDF or eBook, we encourage you to consult one of our lawyers for a more comprehensive analysis of the legal implications of your proposed venture.
- public offerings and private placements
- take-over bids
- business combinations
- related-party transactions
Canadian securities legislation provides that a take-over bid may be triggered when an offer to acquire outstanding voting or equity securities of a class of a public company is made to a person in a Canadian jurisdiction, where the securities subject to the offer, together with the offeror’s own securities, constitute in the aggregate 20% or more of the outstanding securities of that class. The take-over bid rules may apply in the context of the grant of put and call options. It is therefore essential to structure the terms of these options to ensure the availability of take-over bid exemptions where necessary.
The pre-merger notification transaction-size threshold for 2014 has increased to $82 million from the 2013 threshold of $80 million. As per the indexing mechanism set out in the Competition Act (Act), the pre-merger notification threshold is reviewed annually.
The threshold is based on the book value of assets in Canada of the target (or in the case of an asset purchase, of the assets in Canada being acquired), or the gross revenues from sales “in or from” Canada generated by those assets, calculated in accordance with the Notifiable Transactions Regulations under the Act. The Competition Bureau must generally be given advance notice of proposed transactions when the acquired assets in Canada or revenues generated in or from Canada from such assets exceed $82 million, and when the combined Canadian assets or revenues in, from or into Canada of the parties together with their respective affiliates exceed $400 million. This amount has not been reviewed and remains the same as in 2013.
During a proxy contest, strategic consideration should be given to strictly abiding by proxy solicitation rules and hawkishly assessing whether your opponent is doing the same. A recent decision provides guidance on factors that a court will consider in determining a seldom litigated issue – when is communication by the company during a proxy contest an illegal proxy solicitation?
Generally speaking, corporate statutes in Canada prohibit the solicitation of proxies unless the sender (board or dissident) provides shareholders with a proxy circular containing prescribed information. Under the Canada Business Corporations Act, “solicitation” is broadly defined to include communication with shareholders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy”.
In Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324, the board of Equity – following the requisition of a shareholder meeting and proxy solicitation by a dissident shareholder — issued a press release defending the board’s historical actions and responding to criticisms by the dissident Smoothwater. Smoothwater alleged that Equity’s press release was calculated to result in the procurement or withholding of proxies. At the time, Equity had not sent a management information circular.
There are important lessons in a recent Ontario Court of Appeal decision examining shotgun buy-sell provisions, and in particular, the enforceability of a buy-sell offer that does not perfectly comply with the terms and conditions of the shotgun provision.
Unanimous shareholder agreements, partnership agreements, and joint venture agreements often contain what is commonly known as a “shotgun buy-sell provision”, which provides a mechanism for involuntarily expelling one or more parties from the business venture when the business relationship between them sours.