This summer, the Ontario Securities Commission (OSC) demonstrated its regulatory reach in the proxy contest arena. The OSC's statutory mandate is to provide protection to investors from unfair practices and to foster fair and efficient capital markets. The OSC took action on this mandate when it intervened in the battle for control of Partners Real Estate Investment Trust.
On May 28, 2014, Orange Capital LLC, a New York-based hedge fund, announced an offer, or "mini-tender", to purchase 10% of the outstanding units of the REIT at a price of $5.00 per unit, a 7% premium to the then unit price. The offer was open until June 12.
The offer would not have resulted in Orange Capital owning 20% or more of the outstanding REIT units. As a result, it was not a "take-over bid" and therefore not subject to the procedural safeguards and disclosure requirements of the Canadian take-over bid regime.
The offer was made only to unitholders of record as at May 16, the record date for the REIT's annual meeting of unitholders. At the time of the May 28 announcement, Orange Capital stated that it intended to replace the REIT's trustees at the upcoming meeting with its own slate "to be named", and it was a condition of the offer that a depositing unitholder appoint Orange Capital as its nominee and proxy for the meeting.
Proxy Coupled with Tender
The Orange Capital offer contained several provisions that the REIT argued were coercive and abusive to the capital markets and unitholders. A depositing unitholder was required to appoint Orange Capital as its nominee and proxy for the upcoming unitholder meeting in respect of all units deposited, even if the units were not ultimately taken up by Orange Capital. The offer did not specify when deposited units would be taken up and paid for, and Orange Capital could, in its sole discretion and even if all conditions of the offer were met, vary, extend or withdraw the offer. A withdrawal of the offer by Orange Capital, or a withdrawal of units by a unitholder, did not affect the apparently irrevocable proxies required to be delivered under the offer. The REIT referred to these as "bait and switch" tactics aimed at securing control of the REIT without paying for it. The REIT also objected to the short timeframe of the offer, which it claimed was designed to coerce unitholders to tender and deliver their proxies before having any information on Orange Capital's proposed nominees for the REIT. Lastly, the REIT asserted that the offer did not comply with Canadian proxy solicitation laws as Orange Capital was in effect soliciting proxies without having filed a dissident circular.
Complaint to OSC
The REIT filed a complaint with the OSC on June 5. On June 9, after what Orange Capital referred to as constructive discussions with OSC staff, Orange Capital issued a press release extending and modifying the offer. Amendments included:
- Extension of the offer to June 24;
- Units had to be paid for not later than three business days after take-up (which was to occur forthwith once the conditions of the offer were satisfied);
- Proxies associated with units not taken up by Orange Capital due to pro-ration could be revoked, and a mechanism to allow unitholders to revoke such proxies in time to vote the units was created;
- Upon the withdrawal of the offer by Orange Capital, all proxies associated with deposited units were automatically revoked; and
- Proxies associated with units withdrawn by unitholders were automatically revoked.
The next day, Orange Capital filed a proxy circular disclosing its proposed nominees for election to the REIT's board of trustees.
Even though Orange Capital's offer was not subject to regulation under Canadian securities laws, the OSC stepped in to ensure that unitholders were fully informed, and to regulate aspects of the offer that affected the unitholder franchise. Several of the changes announced by Orange Capital following its discussions with the OSC staff were aimed at providing unitholders with enhanced disclosure of the offer terms, such as timing for take-up and payment of the units. Other changes were more directly focused on protecting the unitholders' right to vote, including the extension of the offer to provide investors with the time necessary to review Orange Capital's proxy materials and allowing unitholders to revoke proxies for units not taken up and paid for by Orange Capital. The OSC's involvement is consistent with the approach it took in the VenGrowth Funds decision, where staff challenged a hostile merger proposal on the basis that shareholders did not have sufficient information to make an informed decision or the ability to revoke the support agreements that were solicited by the GrowthWorks fund. In both cases, the regulatory objective was the same: to achieve a predictable, transparent and fair process to give independent security holders a real say in the success of the proxy contest.
What it Means for Proxy Contests
While we cannot know what discussions went on between Orange Capital and the OSC behind closed doors, the outcome of those discussions suggests that the OSC will scrutinize conduct and transaction structures that negatively affect security holders' right to vote. It may have been the existence of the mini-tender that created the jurisdictional pathway for the OSC to intervene, but it may also signal a growing willingness of securities regulators to flex their muscles in the proxy contest arena.
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