There are important lessons in a recent Ontario Superior Court decision examining defensive tactics taken by a board in the context of a contested shareholders’ meeting.
In Concept Capital Management Ltd. v. Oremex Silver Inc., 2013 ONSC 7820, the board of Oremex – during a contested election — postponed a shareholders’ meeting and issued shares to a third party, GRIT, in a financing transaction that closed in escrow on the same date as the revised record date for the meeting. Oremex took the view that the new shares could be voted at the contested meeting.
On January 13, 2014, Institutional Shareholder Services Inc. (“ISS”) issued FAQs explaining its views on by-laws designed to prohibit so-called “Golden Leash” arrangements. As discussed in our post last month, such arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of the target corporation.
ISS’ view is that, absent a shareholder vote, a by-law precluding a nominee director from being compensated by a third party “may be considered a material failure of governance”. Consequently, in such circumstances, ISS may “recommend a vote against or withhold from director nominees for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”
ISS takes no issue with a by-law precluding a director nominee for failing to disclose a third-party compensatory arrangement. ISS’ view is that such by-laws promote transparency and better-informed voting decisions.
ISS’ rationale appears to be that a by-law should not infringe on a shareholder’s fundamental right to vote for an otherwise qualified director without a compelling reason. Recently, after Provident Financial Holdings, Inc. (a U.S. bank holding company) enacted a by-law prohibiting nominee directors from receiving third-party compensation without seeking shareholder approval, ISS recommended that Provident’s shareholders withhold their vote for the incumbent directors that were up for election at Provident’s annual meeting (and who earlier in the year had approved the amendment to the Provident by-law prohibiting such third-party compensation).
Even where a by-law is put to a shareholder vote, ISS will apply a “case-by-case analytical framework”, taking into consideration the board’s rationale for adopting the by-law, whether the by-law materially impairs or improves shareholder rights, and “any market-specific practices or views on the underlying issue.”
ISS’ FAQ is also significant for what it does not say. ISS has not drawn a bright line on the appropriateness of third-party compensation for nominee directors provided such arrangements are disclosed. Therefore, in a proxy battle involving “Golden Leashes”, ISS will likely apply a “case-by-case analytical framework” to assess whether a third-party compensation arrangement poses any risk to “governance, stewardship, risk oversight, or fiduciary responsibilities.”
Industry Canada has announced that the Investment Canada Act (Act) threshold for 2014 that applies to most direct acquisitions of Canadian businesses by non-Canadian investors from World Trade Organization (WTO) member countries is $354 million (an increase from last year’s $344 million threshold). The threshold applies to the gross book value of the target’s assets. Note that under the Act, a non-Canadian includes a Canadian-incorporated entity that is ultimately controlled outside of Canada.
The lower threshold of $5 million continues to apply to direct investments that relate to cultural businesses or where none of the non-Canadian parties comes from a WTO member country.
On a date still to be fixed, new regulations under the Act will come into force, dramatically increasing the $354 million threshold for investors (other than state owned enterprises) from WTO member states to $600 million, $800 million and $1 billion over the next six years, with further increases based on a prescribed formula. When the new regulations come into force, the threshold calculation will be based on ‘enterprise value’, a term still to be finalized.
It is worthwhile to remember that the government is also permitted to review any investment by non-Canadians on the basis of “national security” concerns. No financial threshold applies and the government has up to 50 days, following either notification or the filing of an application for review/approval, to issue notice of a potential national security review. Therefore, if a proposed transaction that is not otherwise subject to approval raises national security concerns, parties should consider filing a notification as early as possible in order to obtain pre-merger clearance (or at least trigger the review period prior to closing).
In July, we published a blog post on the Canadian M&A landscape in the first half of 2013. As 2013 has now come to an end, it seems appropriate to recap what happened in the second half of 2013. McCarthy Tétrault advised on seven of Lexpert’s top ten deals of 2013, published in the January issue of Lexpert. Below, we’ve highlighted some of the major trends and deals that transpired during Q3 and Q4 of 2013.
Second Half Sees Fewer but Larger Deals
Canadian companies were involved in 2,325 announced deals valued at $158.2 billion in 2013, down 28 percent from $219.5 billion in 2012 and the lowest since 2009. As PWC reports, while the number of announcements decreased, deal value rose in Q3 of 2013 to $54.8 billion from $38.9 billion in Q2, a 41% increase in quarter-over-quarter deal value and a 1% increase year-over-year. The primary drivers for this increase in deal value were nine mega-deals (deals valued at more than $1 billion) announced during Q3. These nine deals alone totalled $35.7 billion, the highest total since Q3 of 2007.
We are delighted to share that McCarthy Tétrault’s Canadian Appeals Monitor blog has received a 2013 Clawbie (Canadian Law Blog Award) in the Practice Group Blog category, for its overall excellence in covering Canada’s appellate courts and cases.
Canadian Appeals Monitor is one of McCarthy Tétrault’s 10 blogs covering a variety of practice areas. The Clawbies highlight in particular “This Week at the SCC” as “a strong regular contribution” that “really does take a national firm to pull off.”
We are also very proud of our partner Barry Sookman, whose eponymous Barry Sookman blog was a runner-up in the Clawbies’ Legal Technology category. Barry is the former co-chair of McCarthy Tétrault’s Technology Group and former head of its Intellectual Property Group, and is one of Canada’s foremost authorities in information technology and intellectual property law. He uses his blog to share his views on a wide range of copyright, Internet and information technology issues.
We look forward to more great blogging in 2014!
“Golden Leashes”, and by-laws designed to counteract such arrangements, have provoked significant controversy in the 2013 proxy season, and regulators, proxy advisors, and institutional shareholders have yet to take a definitive position in the debate. This post reviews what will certainly continue to be a hot button topic in 2014. Continue Reading
On November 28, 2013, the Toronto Stock Exchange published proposed amendments to the TSX Company Manual that would permit a listed issuer to adopt new security-based compensation arrangements for employees of a target company in the context of an M&A transaction without the need to obtain shareholder approval provided that certain conditions are met.
The TSX Company Manual provides that a listed issuer must obtain shareholder approval to adopt a security-based compensation arrangement unless the arrangement is provided as an inducement for employment to an officer of the listed issuer or the listed issuer assumes the compensation arrangement of a target company in the context of an acquisition (in each case, provided certain conditions are met). The proposed changes to the TSX Company Manual would create an additional exemption from the shareholder approval requirement where the securities issuable under a new compensation arrangement adopted for employees of a target company in conjunction with an acquisition do not exceed 2% of the number of issued and outstanding securities and the securities issuable under the acquisition (including any related compensation arrangement) do not exceed 25% of the number of issued and outstanding securities. The proposed exemption would only be available for compensation arrangements adopted for persons who are employees of the target company (and not for employees of the listed issuer). The TSX notes that it has permitted listed issuers to adopt these sorts of compensation arrangements without shareholder approval in the past on a discretionary basis and that it is now simply formalizing the exemption.
If the proposed rules are ultimately adopted (the comment period expires on January 13, 2014), the TSX Company Manual will expressly permit a listed issuer acquiring a target company to offer up new equity incentives to employees of the target company as a retention tool without being required to obtain approval of the listed issuer’s shareholders.
It is also worthy to note that a listed issuer should pay close attention to the restrictions under applicable securities laws on collateral agreements in a take-over bid and collateral benefits in a business combination transaction if it wishes to adopt a new security-based compensation arrangement for employees of a target company in the context of an acquisition.
The recent settlement in the United States between the Securities and Exchange Commission (SEC) and Revlon highlights the importance of not appearing to obstruct the flow of material information to shareholders.
The SEC settled charges that Revlon misled shareholders during a going private transaction. The SEC’s order found that to avoid a potential disclosure obligation, Revlon engaged in “ring fencing” to avoid knowing that the transaction’s consideration had been deemed inadequate by a third party’s financial advisor.
Check out our new post published on our Retail Consumer and Advisor Blog on Buying Into Beauty, the recent Mergermarket report prepared in association with Michel Dyens & Co. In addition to highlighting some of what we think are the key themes coming out of that report for the retail and consumer products audience in particular, our post also summarizes some of what we think are the key takeaways on M&A activity in the beauty and personal care industry more generally.
Of course there is plenty more exciting news on M&A activity in this space, which you can read about by checking out the full report here.
In a recent ruling in Genesis Land Development Corp. v. Smoothwater Capital Corporation, the Court of Queen’s Bench of Alberta found that a dissident shareholder breached its obligations under securities law when it failed to properly disclose, in an early warning report, that it was acting “jointly or in concert” with other dissident shareholders to gain control of the Genesis board of directors. In its finding, the Court confirmed that, for purposes of disclosure under the early warning reporting system, the concept of acting “jointly or in concert” is relevant not only to take-over bids, but it is also relevant to proxy contests.
The dissident shareholders in question argued that the concept of acting “jointly or in concert” only gives rise to disclosure obligations in the context of a take-over bid. This argument was rejected by the Court which held that, despite the ambiguity arising from the use of the term “offeror” in section 1.9 of Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids (“MI 62-104”), the early warning requirements must be interpreted to require disclosure of persons acting jointly or in concert if there is any “agreement, commitment or understanding” to exercise voting rights, including in the context of a proxy contest. The Court cited a recent notice of the Canadian Securities Administrators on the rationale for the early warning system: “the objective of early warning disclosure is not only to predict possible take-over bids but also to anticipate proxy-related matters”.
In addition to deciding that the concept of acting “jointly or in concert” is relevant in the context of proxy contests, Genesis also sheds some light on what factors may be relevant to determining whether shareholders have acted “jointly or in concert” in this context. In particular, the Court took the following factors into consideration in reaching its decision:
- the dissidents participated on a conference call during which they discussed the company’s intended board nominees for the upcoming AGM and considered pressuring the board to nominate an alternate slate (and, as conceded by some of the dissidents, there may have been discussion of launching a proxy contest). A proxy solicitation firm was present on the call. The call was followed by several others that included some or all of the dissidents and the proxy solicitation firm;
- although the dissident circular was in the name of only one of the dissidents, an earlier version of that document had been prepared by another member of the dissident group; and
- some of the dissidents entered into a formal voting support agreement.