The Ontario Superior Court of Justice recently issued its
decision in Smoothwater Capital Partners LP I v.
Equity Financial Holdings Inc. The decision deals
with the interplay between the issuance of a press release by a
company to address allegations levelled by a dissident shareholder
and the proxy solicitation rules, which prohibit the solicitation
of proxies without sending a proxy circular. The court affirmed
that the existence of a proxy solicitation is a question of fact
depending on the nature of the communication and the circumstances
of the transmission. In the case at hand, the court concluded that
the company did not violate the proxy solicitation rules as the
"principal purpose" of the company's press release
was to provide certain explanations and defend its historical
position, not to solicit proxies.
In November 2013, Smoothwater Capital Partners
("Smoothwater") commenced a proxy battle seeking to
replace seven of nine incumbent board members and appoint three new
directors in order to form a board of five directors of Equity
Financial Holdings ("Equity" or the
Smoothwater proceeded to requisition a shareholders' meeting
and issued a series of press releases reflecting its intention.
Smoothwater's press release dated December 5, 2013 contained a
lengthy and detailed criticism of Equity's corporate governance
practices as well as its management and board of directors. Equity
responded on December 10, 2013 with its own press release,
criticizing Smoothwater's motives and qualifications while
defending the Company's record and touting past successes. At
this time, neither party had sent a proxy circular to Equity's
An application to the Court was filed by Smoothwater alleging a
breach of the proxy solicitation rulesby Equity. Smoothwater took
the position that Equity's press release of December 10, 2013
was "calculated to result in the procurement or withholding of
a proxy" and therefore constituted a "solicitation"
as defined in s. 147 of the CanadaBusiness Corporations
Act (the Act). As Equity had not sent
shareholders a management proxy circular in connection with
the alleged solicitation, Smoothwater argued that Equity breached
the provisions of s. 150 of the Act. Equity, on the other hand,
argued that its press release was not a proxy solicitation but (i)
disclosure intended to address inaccurate statements made by a
dissident shareholder in its own press release and (ii) an attempt
to keep its shareholders informed at a critical
The Court held that Equity's press release was not a proxy
solicitation and dismissed Smoothwater's application. In
coming to this conclusion, the Court accepted Smoothwater's
submission that "solicitation" is to be defined broadly
and inclusively, and that the determination of the existence of a
solicitation depends on the nature of the communication and the
circumstances. However, the Court found that given the nature
and circumstances of Equity's press release, it did not fall
within this interpretation.
The Court also distinguished a number of prior decisions relied
on by Smoothwater on the basis that the communications at issue in
those decisions were all issued by shareholders and not the
company, and in certain cases expressly referenced an intent to
solicit proxies or involved the issuance of numerous press releases
in contrast to the one press release in question issued by
The Court indicated that "it is inevitable that, when
involved in a proxy fight, anything said by Equity could be
characterized as a solicitation but the principal purpose of the
document cannot be ignored." Taking all of the factual
circumstances into consideration, the Court found that the
principal purpose of Equity's press release was to defend,
among other things, its history and leadership and take issue with
Smoothwater's track record given the criticisms levelled by
Smoothwater, and that the press release stopped short of requesting
proxies from shareholders. The Court also noted the Equity
press release must be looked at on its own, and does not constitute
a solicitation by the mere fact that Smoothwater had commenced a
While target companies engaged in a proxy contest may applaud
this decision for providing greater leeway to fight back against
dissident shareholders without breaching the proxy solicitation
rules, it will be interesting to see if the ruling can be equally
relied upon by dissidents for their own
The proxy fight between Smoothwater and Equity remains ongoing.
Equity's annual and special meeting of security holders is
currently scheduled for March 28, 2014.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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