There is little doubt that shareholder activism remains alive and well in Canada and that boards of directors will increasingly face critical decisions on how to respond to maneuvers by dissident shareholders. The recent decision of the Ontario Superior Court of Justice in Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324 is a practical one and should provide comfort to boards of directors seeking to respond to allegations raised by dissident shareholders in the face of a requisitioned shareholders meeting, without tripping over proxy solicitation rules.
On December 10, 2013, Equity Financial Holdings Inc. ("Equity"), a TSX-listed company, issued a press release titled "Equity Financial Inc. Sets the Record Straight" (the "Press Release"). The Press Release followed the announcement of the date for a meeting of the company's shareholders requisitioned by dissident shareholder, Smoothwater Capital LP I ("Smoothwater"). The Press Release can be found here.
Smoothwater argued that the Press Release constituted an improper solicitation of proxies contrary to the provisions of the Canada Business Corporations Act ("CBCA"), since Equity had not yet delivered a management proxy circular. Equity took the position that the Press Release did not constitute a proxy solicitation, but rather served as a public disclosure intended to correct inaccurate statements made by Smoothwater in its own press release.
The Court agreed with Equity and concluded that the Press Release did not constitute a proxy solicitation. In its proper context, the Press Release defended Equity's history, leadership and explained the company's rationale for choosing a particular date for the requisitioned shareholders meeting. The Court distinguished prior cases on the basis that the Press Release stopped short of requesting proxies from shareholders and merely advised shareholders that a management information circular would be forthcoming. The Press Release was also distinguished on the basis that it was issued by Equity in defence of its corporate position rather than having been issued by shareholders.
The Smoothwater case indicates that notwithstanding the broad definition of "solicitation" under the CBCA, courts will fully consider the content and purpose of a press release or other communication when deciding whether it constitutes a solicitation of proxies. Where a communication to shareholders does not encourage shareholders to provide proxies to the incumbent board of directors but serves some other purpose, including responding to a dissident press release, then it may be onside the CBCA proxy solicitation rules even where management has not yet delivered a proxy circular.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
