Court Considers the Use of Corporate Press Releases during a Proxy Fight
In Smoothwater Capital Partners LP Inc. v. Equity Financial Holdings Inc., 2014 ONSC 324, the Court considered whether a corporate press release that responds to allegations of misconduct by a dissident shareholder amounts to "solicitation" of shareholder proxies.
The issue arose because before soliciting proxies, a corporation must send a management proxy circular to the corporation's auditor, to each shareholder whose proxy is solicited, and to each of its directors. If the company fails to comply with those requirements and the directors and officers knowingly authorize, permit, or acquiesce to that violation, the directors and officers are liable on summary conviction to an offence with maximum sanctions of a $5,000 fine or six-month imprisonment.
The Court held that the corporation did not engage in solicitation of proxies by issuing a single press release which (i) refuted the allegations of misconduct against the Board of Directors and (ii) did not request proxies from shareholders.
The decision provides guidelines for proxy fights which are becoming more frequent in Canada and, particularly, provides some framework on when press releases can cross the line to amount to solicitation of proxies.
The applicant, Smoothwater Capital Partners LP Inc. ("Smoothwater") was a shareholder of the respondent Equity Financial Holdings Inc. ("Equity").
In December 2013, Smoothwater requisitioned a Special shareholders' meeting. Equity scheduled the Special meeting on March 28, 2014, the same day as the Annual General Meeting.
Smoothwater issued a press release which included a request for proxies from shareholders. The release was critical of, among other things, the timing of meeting and the conduct of Equity's board of directors (the "Board").
In response, five days later, Equity released a press release titled "Equity Financial Holdings Inc. Sets the Record Straight". It defended the Board's actions. As well, it was critical of Smoothwater for initiating an expensive and unnecessary proxy fight without engaging management or the Board in meaningful discussions to resolve its concerns. It concluded:
"The Board will continue to engage with shareholders and consider their views. In connection with the Annual and Special Meeting of Shareholders, the Corporation will provide a management information circular that will be mailed to shareholders and posted on the Corporation's website and SEDAR."
Equity had not yet distributed a management proxy circular.
Smoothwater applied to the Court seeking an order restraining Equity from soliciting proxies in breach of section 150 of the
Canada Business Corporations Act, R.S.C., c. C-44 (the "CBCA").
In response, Equity submitted that the press release was not a proxy solicitation but rather disclosure intended to address inaccurate statements by Smoothwater.
Statutory Provisions Govern Proxy Solicitation
To ensure fairness in proxy battles, proxy solicitation is governed by provisions in the CBCA. Pursuant to section 150, management may not solicit proxies from shareholders until after it has sent a management proxy circular to the corporation's auditor, to each shareholder whose proxy is solicited, and to each director. Similarly, no person may solicit proxies until the shareholder's dissident proxy circular has been filed.
However, there are broad exceptions which apply to non-management solicitation which allow dissident shareholders to solicit proxies prior to filing the circular.
These provisions are of considerable importance to directors or officers as those who knowingly authorize, permit, or acquiesce to an act deemed to be "solicitation" of proxies. These individuals are liable as parties to the commission of an offence under section 150(4) of the CBCA. The sanction for that offence may include a fine of up to $5,000 and/or imprisonment for up to six months.
The definition of "solicitation" contained in section 147 of the CBCA is broad and inclusive. Whether an act constitutes solicitation depends on the nature of the communication and the circumstances of its transmission.
In this case, a single Equity press release was put in issue by Smoothwater. That press release did not expressly reference an intention by Equity to solicit proxies.
The Court held that the nature of the communication and circumstances of its transmission did not constitute solicitation. In context, the press release defended the Board's historical actions and explained the purpose of combining the Special Meeting with the Annual General Meeting.
The Court stated "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." The press release did not encourage shareholders to give their proxies to Equity; rather, in its summary, it advised shareholders that a proxy management circular would be forthcoming.
The Court concluded that the press release must be looked at on its own – not with reference to the fact that Smoothwater had already commenced soliciting proxies pursuant to an exception that was not available to Equity.
The key factors the Court considered were: (i) only a single press release was in issue; (ii) the press release did not explicitly solicit proxies; and (iii) the purpose of the press release was to respond to the dissident shareholder's allegation of historical misconduct – not to promote future actions.
In this decision, the Court allowed a corporation to defend itself from alleged misstatements made by dissident shareholders in advance of filing of a management proxy circular. Each case will be considered on its unique facts but this decision provides guidance to directors and officers if the corporation is embroiled in a proxy battle. The corporation may issue a responding press release but it should attempt to make clear that the intention of the press release is to respond to the misstatements of the dissident shareholder not to solicit proxies from shareholders.
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.