Norton Rose Fulbright recently led a successful court application that illuminates the importance of public disclosure in the context of a proxy battle. This precedent-setting decision is relevant to all public companies, and it has far-reaching implications in the context of shareholder activism.
On August 15, 2013, Justice Romaine of the Court of Queen's Bench of Alberta ruled that an activist shareholder had breached its obligations under Alberta securities law by failing to disclose, in an early warning report filed on the eve of issuing a dissident proxy circular, that it was working "jointly or in concert" with other dissident shareholders.1
Disclosing the existence of joint actors is explicitly required in early warning reports, regardless of whether or not the shareholders are involved in a take-over bid. In this case, the evidence revealed, and Justice Romaine found, that the respondent shareholders had been working jointly or in concert in a plan to take control of the applicant's board of directors at the upcoming annual general and special meeting (AGM).
This lack of disclosure gave rise to a right of application under section 180 of the Alberta Securities Act, which gives the court a wide-reaching discretion to impose any remedy it sees fit to correct a wrong. Justice Romaine used this discretion to first order the activist shareholder to publicly disclose that it was acting jointly or in concert with the other respondents, and second, to postpone the AGM for one month to allow the market to digest this information and, if they wished to do so, for shareholders to change their votes.
While counsel for the respondents argued that this disclosure deficiency did not prejudice shareholders, the court held that it was not possible to conclude this was true. The court also noted that it was not its role to decide what information shareholders would find relevant while investing or in exercising the voting rights attached to their shares.
Best practices: disclosure
The ruling is an important decision with respect to when shareholders will be found to be acting jointly or in concert, and clarifies that this is an important matter to bear in mind even outside the context of a take-over bid. It is also an important decision with respect to the disclosure obligations of major shareholders, particularly ones engaged in dissident proxy contests. The decision further provides guidance to both issuers and shareholders with respect to "best practices" as they relate to shareholder disclosure in advance of a proxy contest. For example:
- The decision highlights the importance of the contents of early warning reports, particularly those filed by a dissident shareholder on the eve of a proxy contest, and demonstrates the importance of full and accurate disclosure in such early warning reports;
- Shareholders must now be more mindful of the risk of being found to have been working jointly or in concert in the days and weeks leading up to the launch of a proxy contest, particularly where there has been no public disclosure of this fact, or an early warning report has been filed that specifically denies the existence of any joint actors;
- The decision makes clear that disclosure of the existence of any joint actors is required whether or not the dissident's conduct amounts to a take-over bid.
Given the recent increase of proxy contests in Canada, this decision is important both for major shareholders of publicly traded companies and current boards and management of such companies.
1 Genesis Land Development Corp. v. Smoothwater Capital Corporation et. al. (Alberta Court of Queen's Bench Action No. 1301-09274).
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