Canada: Directors' And Officers' Liability Update

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.

Facts

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.

Analysis

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.

Conclusion

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions