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A special committee is a committee of directors established by the board to undertake certain tasks delegated by the board.1 These tasks are typically set forth in a written mandate and can range from overseeing a strategic review process, to evaluating and negotiating change of control transactions, to conducting an internal investigation with respect to alleged wrongdoing within the company, or to organizing a search for a new member of senior management, such as a CEO. Accordingly, a special committee is generally established for a specific purpose and only for a limited period of time.
Most of the characteristics of any particular committee, including its composition, mandate, and remuneration will depend on the specific facts and circumstances giving rise to the establishment of the committee. For example, where a public company is the subject of a potential change of control transaction, as is the case where an unsolicited take-over bid is made for the company, the establishment of a special committee of independent directors with a mandate to evaluate the bid and examine alternatives is viewed as one of the classic mechanisms to ensure the maximization of shareholder value. In other circumstances, a board may choose to establish a special committee of directors with a particular expertise to evaluate and report to the board regarding specific business projects or strategic transactions proposed by management.
Given the varied nature of special committees and the circumstances in which they are established, it is not possible to provide one set of rules or guidelines to be equally applied in all cases. Accordingly, the following discussion is designed to provide some general principles to guide directors in Canada in determining whether and when to establish a committee as well as providing a general understanding of the duties of committee members and the manner in which those duties should be discharged.
1. Should a special committee be established?
A special committee may be established for a variety of reasons. Most often, a committee is established where there may be concern regarding an actual or perceived conflict of interest with respect to a particular transaction. In these circumstances, the establishment of a special committee of independent directors provides a procedural safeguard in transactions involving real or perceived conflicts of interest and is one of the factors that courts will assess in determining whether the directors have exercised appropriate "business judgment".
In other cases, a board may feel that, due to time commitments of board members, a smaller group of directors should be appointed to a committee to deal with certain matters on a more efficient basis.
There is generally no legislative requirement to establish a special committee;2 however, it is often prudent, and is becoming the norm, to establish a special committee of independent directors in a wide variety of circumstances:
- The classic example of a special committee arises where a
company has been "put in play" by virtue of an
unsolicited take-over offer or where a company puts itself in
play by publicly announcing an auction process. In these
circumstances, it is prudent to establish a special committee
comprised of directors independent of management and
independent of significant shareholders to evaluate any
offers and to consider alternatives and, in the case where an
unsolicited offer is made, to consider defensive measures. In
circumstances where the party making the offer is an insider
of the company (i.e., a "going private"
transaction), the special committee will take on an even
greater role given the heightened need for independence
within the process.
- A board may determine that an evaluation of strategic
alternatives is necessary. These alternatives may include a
significant change in the direction of the business, or a
recapitalization or reorganization or the sale of the
company. In these circumstances, the board may wish to
appoint a special committee of directors to evaluate these
alternatives with senior management and, potentially, outside
financial and legal advisors.
- A board may learn of allegations of potential wrongdoing
within the company. Depending on the circumstances, the board
may direct the audit committee to investigate the allegations
or may establish a special committee for this purpose.
- A board may delegate to a special committee the task of
seeking out a qualified individual to fill the role of the
company's Chief Executive Officer or other senior
member of management.
In other circumstances, such as where the board is comprised of only a few members and no particular board member has an identifiable expertise for the proposed task of the committee, the entire board may desire to undertake the proposed mandate of the committee. In that case, the committee is, in effect, a committee of the entire board.
When determining whether to establish a committee, the board of a public company should also consider other factors, including whether the establishment of the special committee itself needs to be disclosed or whether the existence of the committee otherwise may have to be disclosed at a later stage in the course of the company's regular continuous disclosure filings. In that regard, disclosure of the mere existence of a special committee may give rise to speculation within the investing community, even where such speculation may be premature or unwarranted.
Where a committee has been established, public company boards must also be mindful that, even if the existence of the committee and its mandate remain confidential, the fees paid to committee members may need to be disclosed in the company's management proxy circular and therefore the existence of the committee may become known.
Establishing a special committee also is not without cost since, depending on the additional time and effort demanded of the committee members, committee members generally should receive additional compensation. Further, the committee often is empowered to retain, at the expense of the company, independent legal, financial or other outside expert advisors to assist in discharging its mandate.
2. Does the establishment of a special committee by a public company require disclosure?
The mere fact that a special committee has been established need not be disclosed; however, the circumstances that led to the creation of the special committee may make it desirable to disclose the existence of the committee, especially where the circumstances are publicly known or otherwise require disclosure. For example, if a company is subject to an unsolicited take-over bid, the company may wish to disclose that a committee has been established to respond to the bid. In other circumstances, the board may wish to disclose that it has established a special committee to review strategic alternatives or to conduct a public auction. In those circumstances, the company may disclose the committee's existence as part of a larger strategy designed to put the company "in play".
The circumstances in which the committee is established and the scope of the committee's mandate may also give rise to enhanced disclosure requirements when disclosure ultimately is made. For example, in the public M&A context, applicable securities laws typically require, at a minimum, detailed disclosure concerning the deliberations of the board and the special committee, including a discussion of any materially contrary view or abstention by a director and any material disagreement between the board and the special committee.
At a later stage in the process, such as when the committee delivers its report to the board, the board must carefully consider whether and what public disclosure is necessary if disclosure has not already been made.
3. Who should serve on a special committee?
The board should consider a number of factors when selecting committee members, including the individual's ability to make decisions free of any conflict, real or perceived, the individual's expertise to consider the matter to be delegated to the committee and the availability of the individual to devote the necessary time to fulfill the committee's mandate.
Members of a special committee should be free of conflicts of interest, real, perceived or reasonably foreseeable. Quite apart from the technical legal definitions of independence that apply in different contexts, prospective committee members should be asked to disclose any relationships giving rise to potential conflicts so that the board may properly review them. Conflicts may arise on a number of levels, including in business, professional or family relationships. Any deliberations concerning potential conflicts should be documented for the record and, in some cases, may need to be publicly disclosed and explained. In many cases, it may be appropriate to disclose certain relationships that were considered by the board, together with the board's reasons for determining that the director's independence was not compromised.
In certain circumstances, certain board members should not serve on the committee. In particular, members of management and significant shareholders generally should not be considered for membership on a special committee in the context of a change of control transactions, since the committee's independence may be called into question. In one notable example a committee established in connection with a take-over bid was found not to be independent where the committee included, as an active participant, the president and chief executive officer of the company and, as an observer and resource, a representative of a shareholder holding 50% of the votes. In another context, if a committee has been established to undertake an investigation of accounting irregularities then, depending on the nature of the allegations, it may be appropriate to exclude members of the audit committee.
While independence is a significant consideration when determining who should serve on a committee, membership on a special committee invariably requires a director to devote a significant amount of time to attend meetings, meet with advisors and to review substantial materials, often on very short notice. As a result, a director may be otherwise well qualified to serve on a committee, but due to his or her travel schedule or other commitments, it may be inappropriate for the director to serve on the committee.
4. What factors are considered in assessing the independence of a committee member?
When assessing the independence of a director, one obvious question is from whom, or from what, must the director be independent. The answer to the question depends on the reason for the committee's establishment.
In certain circumstances, the law automatically precludes an individual from being considered as independent. More generally, one must apply reasonable judgment in assessing whether any relationship that the director has with the company, management, shareholders or others should disqualify the director from serving on the special committee. The key is to consider whether the committee member's judgment might be, or might be seen to be, impaired as a result of the relationship. At the same time, courts have recognized that any potential conflict of interest must be balanced against the reasonable benefit to be obtained by appointing a specific individual to serve on the committee.
For example, where a committee is established to review a proposed going private transaction initiated by a significant shareholder, the board must consider relationships between board members and the significant shareholder and parties related to the significant shareholder. For example, a prospective committee member may have invested with the controlling shareholder in an outside business venture unrelated to the company. In this case, the board should consider the relative size of the investment in the venture by both the prospective committee member and the controlling shareholder, the relative influence of the controlling shareholder in the venture and the relative importance of the investment to the prospective committee member. The board must consider whether, in light of that relationship, the prospective committee member will be able to, or will be perceived as being able to, make decisions with respect to the going private transaction proposed by the controlling shareholder.
Each of Ontario and Quebec has enacted special rules (the "Special Transaction Rules")3 designed for the purpose of ensuring procedural fairness in certain special transactions where additional procedural safeguards may be necessary to prevent potentially abusive or unfair transactions. Such transactions include those where there is presumed to be an inequality in the knowledge of the affairs of a company between the public shareholders and an insider who has nominees on the board and who is seeking to take the company private.
Under the Special Transaction Rules, certain relationships automatically disqualify a board member from serving as an independent director, including if the director was recently employed by, or has a significant equity interest in, a party to the transaction. While the Special Transaction Rules apply only to specific types of transactions involving public companies, the relationships enumerated in those rules may be considered as indicative of the types of relationships that should be considered in all cases.
In addition to the Special Transaction Rules, directors also should consider the guidelines published by the Canadian securities regulators with respect to the corporate governance of public companies (the "Guidelines").4 The Guidelines provide recommended best practices for public companies and include recommendations regarding the number of independent directors that should comprise a board and certain specified board committees, though the Guidelines do not specifically address special committee membership. In that regard, the Guidelines also describe certain relationships that automatically disqualify a board member from being considered an independent director for purposes of the Guidelines. While the Guidelines do not specifically address membership on special committees, the relationships described by the Guidelines should be considered carefully when evaluating the independence of a director to serve on a special committee.
The findings and recommendations of a special committee that is comprised of directors free of conflicts may be less susceptible to criticism by courts, regulatory authorities, investors and the media, assuming that the deliberations of the committee have been conducted in an appropriate manner.
5. What is the mandate of a special committee?
The tasks to be delegated to the committee, the authority of the committee to discharge those tasks and other matters, including the compensation payable to committee members, should be made clear in a written mandate approved by the board prior to the committee commencing its work. A clear mandate adopted at the outset of the committee's work will clarify the committee's duties and will reduce the possibility of disputes later in the process, including with regard to the scope of the committee's activities. In addition, the board will have a clear understanding of which tasks remain for consideration by the full board.
The committee's mandate also will serve as a measuring stick against which the process adopted by the board, as well as the deliberations of the special committee, will be judged. In that regard, the findings and recommendations of the committee may be less susceptible to criticism if the committee has been sufficiently empowered. For example, if a committee is charged with the task of conducting an internal investigation but does not have the expertise or time to undertake a forensic investigation itself, the committee should be empowered to retain appropriate outside advisors to assist.
A written mandate should provide for, among other things, the membership of the committee, the task(s) to be delegated to the committee, the authority for the committee to retain advisors on terms negotiated by the committee and the compensation to be paid to the committee members.
A typical special committee mandate in the M&A context includes the following tasks: (i) considering alternatives available to the company; (ii) considering a canvass of the market and/or solicitation of other proposals; (iii) reviewing all proposals; (iv) negotiating or supervising the negotiations of proposals; and (v) making a recommendation to the board. A sample mandate in this context is attached as Appendix "A".
A mandate for a committee established to conduct an internal investigation will have other powers, including the power to obtain and review internal company records and to determine whether and when public disclosure is necessary. A sample mandate in this context is attached as Appendix "B".
6. What procedures govern the workings of a special committee?
The mandate of the special committee may prescribe the specific procedures to govern the committee's formal deliberations, including the timing of notice of meetings, quorum requirements and related matters. Often, the mandate may simply incorporate the procedures specified in the company's by-laws governing meetings of the board of directors. In other circumstances, the committee may be empowered to establish its own procedures. For example, depending on the committee's work, the committee may wish to establish more stringent quorum requirements than are called for by the company's by-laws or, in other circumstances, the committee may wish to require matters to be approved by more than a simple majority vote. The committee may wish to grant the chair a second or casting vote, such as where the committee is comprised of an even number of members.
Generally, when establishing the special committee, the board of directors will appoint the chair. In other cases, the committee itself may be empowered to appoint the chair. In many cases, the issue may be insignificant; however, the board may wish to empower the committee to appoint its own chair particularly in circumstances where the board determines it appropriate for the committee to operate with a greater degree of independence.
7. How should members of a special committee be compensated?
One of the more common questions raised when establishing a special committee is the amount of additional compensation, if any, that the board should authorize to be paid to committee members. In many cases the special committee members will be required to expend significant time and effort in order to fulfil the committee's mandate and to ensure that they have properly discharged their duties. Accordingly, compensating committee members for their time and effort in fulfilling the committee's mandate is quite customary and appropriate.
To avoid later disputes and to avoid the appearance of any impropriety, compensation should be established at the commencement of the special committee's activities. The compensation structure should appropriately take into account the committee's mandate and, if necessary, the fact that the committee's responsibilities may be more involved than originally anticipated. If the compensation structure is not appropriately designed at the outset, it may be difficult to compensate committee members after the fact without raising questions concerning their independence. For example, on successful completion of an M&A transaction, if committee members are compensated with a "bonus" or other payment in recognition of their efforts, outside observers may question whether such payment was linked in some manner to the outcome of the transaction on which the committee was advising and therefore could have influenced the committee's deliberations. In the context of transactions governed by the Special Transaction Rules, the securities regulators in Ontario and Quebec have stated that they are of the view that compensation of committee members should ideally be set when the committee is created and be based on fixed sum payments or the work involved.
There are no specific rules governing the quantum of compensation that may be paid to committee members; however, compensation should not be contingent on the success of a particular transaction or on the particular finding of the committee, as such arrangements could severely compromise the perceived independence of the committee. In that regard, a member of an independent committee is generally prohibited from receiving any payment or other benefit that is contingent on the completion of a transaction to which the Special Transaction Rules apply. The quantum of the compensation should not be excessive in relation to the fees paid to board members in connection with their regular board duties or, for that matter, the compensation paid to management. In establishing the compensation structure and quantum of compensation, public company directors should bear in mind that the committee fees ultimately might need to be disclosed to shareholders in a management proxy circular when discussing compensation of directors.
Other factors to consider when establishing compensation are the objectives of the committee and the time and effort expected to be expended. A compensation structure may include a fixed fee for service (which in some cases may be expressed as a monthly or quarterly fee), with the chair generally receiving a higher amount given the chair's added responsibilities. In addition, committee members also may be paid a fee for attendance at meetings based on the attendance fee paid to the directors for attendance at regular board meetings. In this way, committee members can be appropriately compensated in the event that they are required to meet on a more frequent basis than was originally anticipated. This fee also may be higher or lower depending on whether attendance is by phone or in person and may vary depending on the length of the meeting. A committee member's reasonable out-of-pocket expenses also should be reimbursed, including travel expenses. In establishing compensation, the board also could look to the compensation paid to members of the audit committee as a reference point.
Gathering public information regarding committee fees is difficult due to, among other things, the fact that the subject company is often taken private prior to the time that a management information circular is required for the company's next annual meeting (when such fees would have to be disclosed). Based on an informal, "unscientific" survey of available public disclosure in management information circulars and similar public filings made by over fifty Canadian reporting companies from January 2005 to June 2007, it is evident that compensation practices are quite varied.
Attached as Appendix "C" are some general conclusions drawn from the informal survey.
Drawing firm conclusions from the data is challenging without a detailed review of the circumstances of the particular transaction in which the committee was involved, including the scope of the committee's mandate, and the company's general board compensation practices. For example, a fixed fee of under $10,000 might initially seem insignificant compared to the fees paid in other cases; however, such a fee may be entirely appropriate if, for example, the committee's work is completed in a week's time or if fees are also paid for attendance at meetings. Based on the survey referred to above and anecdotal evidence, typical compensation paid to members of a special committee of a larger TSX-listed company involved in an M&A mandate ranges from approximately $25,000 to $50,000 or more for regular members, with an additional $5,000 to $15,000 paid to the committee chair, plus a fee paid for attendance at committee meetings.
8. What is the relationship between the special committee and the board of directors?
A special committee is a committee of the board established to undertake a specific task or set of tasks. The committee's duty generally is to report to the board and often to make a recommendation for consideration by the full board. In some circumstances, such as where an insider proposes to take the company private, the members of the committee also may be the only directors entitled to vote on the matter at the board level and, accordingly, the recommendation of the committee effectively becomes the vote of the board.
Prior to making its formal recommendation, the committee will generally provide regular updates to the board at meetings of the full board. In addition, the chair of the special committee may provide more informal updates on a periodic basis to the chair or other members of the board.
Other board members may attend and participate in meetings of the committee out of interest or where a board member may have a particular expertise in a matter that is being discussed. While in many cases it is entirely appropriate for other board members to participate in committee proceedings, the committee should, as a routine item of business, conduct some part of each meeting without those other board members present. In that way, the committee can ensure that it uses available resources without compromising its independence.
9. What is the relationship between the special committee and management?
As a practical matter, the special committee will almost always depend on management to some extent, regardless of the committee's mandate, given management's expertise and day-to-day experience in running the company. In addition, management will be expected to assist the committee in carrying out its mandate by issuing press releases, drafting or commenting on disclosure materials and transaction agreements, establishing data rooms, or identifying consultants. In addition, the secretary or the assistant secretary of the company may attend at meetings of the committee to record the minutes of the meeting. Due to the need to rely on management, it is quite customary for the mandate of the special committee to direct management to co-operate with the committee.
Notwithstanding a special committee's reliance on management, the committee members also need to remain aware of the potential conflicts between the interests of management and the other interests that the committee must protect. In certain cases, management may be in a position of irreconcilable conflict and therefore should not unduly influence, or be seen to have unduly influenced, the committee's deliberations.
In the context of a special committee's review of strategic alternatives, management would be expected to have informed views regarding the business impact of certain initiatives and the viability of various alternatives. In those circumstances, it is appropriate to have members of management present during committee meetings to provide information concerning the issues on which the committee is to deliberate. Often, senior management such as the Chief Executive Officer or the Chief Financial Officer can be an invaluable resource where the committee must consider, for example, the future prospects for the company and strategic options.
If, however, a strategic review includes or leads to an auction of the company the committee will need to carefully consider the potential conflicts that management may face. In particular, management may favour one prospective buyer over others, in spite of the relative merits of one proposal over another, if management perceives that it will have greater prospects for continued employment under one buyer than another. For example, management may favour a private equity buyer over a strategic buyer given that the strategic buyer may view current management as redundant. In other cases, management may be entitled to sizeable change of control payments that could influence their views on certain strategic alternatives. Consistent with the proper discharge of its duties, the special committee in this and similar contexts must ensure that it asks appropriate questions of management to probe the information that is presented by management.
In other contexts, such as an investigation into alleged accounting irregularities, the special committee should conduct its investigations and proceedings without management present, particularly those members of management whose activities are the very subject of the investigation by the committee.
Regardless of the level of interaction between the special committee and management, the special committee should, as a routine item of business, conduct some part of each meeting without management present. By making an in camera session a routine part of the committee's meetings, the committee may be able to avoid potentially uncomfortable circumstances in which management may grow suspicious of a sudden request for them to leave the meeting.
10. What are the duties of a member of a special committee?
A comprehensive discussion of directors' duties is beyond the scope of this discussion. Accordingly, the following briefly highlights some key considerations for directors when serving on a special committee in Canada.
A director must act honestly and in good faith with a view to the best interests of the corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.5 This general duty serves as the basis of the duty of committee members in discharging the committee's mandate. In the context of a non-corporate issuer, such as a trust, the duty of the trustee will be stipulated in the declaration of trust but likely will be substantially similar to the duty provided in corporate statutes.
In circumstances where a committee has been established to address real or perceived conflict of interest concerns, the committee members will be expected to exercise independent judgment.
In the context of Canadian M&A transactions, when a corporation is "in play", the directors of a target company may have specific duties as specified in some leading court decisions. For example, in the context of a hostile take-over bid situation where it is apparent there will be a sale of equity and/or voting control of a company or, in other words, the company is "in play", the directors have a duty to act in the best interests of the shareholders as a whole and to take active and reasonable steps to maximize shareholder value.6 In these circumstances, the directors are required to exercise these duties and carry out the maximization process in a fashion that takes into account, and minimizes to the fullest extent reasonably possible, the conflict of interest that is inherent in the position in which they find themselves.7 Canadian courts have also recognized, however, that an auction is not necessarily the sole way to discharge this duty and, in fact, an auction may not be appropriate in some circumstances, such as where a controlling shareholder has agreed to sell its shares to a specific buyer to the exclusion of all others. In that regard, courts have recognized that there is no single "blueprint" that directors must follow.8
11. How should a special committee discharge its duties?
In carrying out their duties, directors are expected to act prudently and on a reasonably informed basis. Accordingly, while a high degree of diligence is demanded, the standard is less than perfection. Where a director's decision is a reasonable one in light of all the circumstances about which the director knew or ought to have known, courts will not interfere with that decision. The court's inquiry will generally focus on whether the directors applied an appropriate degree of prudence and diligence in reaching their decisions.9 The foregoing is also known as the "business judgment rule".
For example, in the context of M&A transactions, Canadian courts have held that the business judgment rule applies if a board of directors has acted on the advice of a special committee of independent directors that has acted independently, in good faith, and made an informed recommendation as to the best available transaction for the shareholders in the circumstances.
The following are some practical steps that can and should be taken by a special committee in discharging its mandate:
- Ensure that committee members are
independent: Each member of the special committee
should feel free to deal with the matter under consideration
on its merits. The board of directors should consider the
various relationships of the committee members and consider
whether those relationships give rise to any conflicts, real
or perceived. No member of senior management should be
appointed to the special committee.
- Analyze sufficient information: The
special committee should ensure that it has a proper
understanding of the legal, business and financial
implications of any particular matter under consideration. In
doing so, the committee members should not accept advice or
information without question, and should make all appropriate
inquiries to ensure that they have the proper understanding
of the matter at hand.
- Solicit independent legal, financial advice and,
where necessary, advice of other experts: Include
those advisors in all portions of meetings where their advice
may be needed, including discussions about the
recommendations of the special committee. Among other things,
these advisors will also assist the committee in
understanding the legal, business and financial implications
of the matters being considered.
- Take enough time: The special committee
must not make decisions with undue haste. It may be more
appropriate for a committee to delay a process for a period
of time to allow the committee to make appropriate inquiries
to ensure a complete understanding of the matters under
consideration. For example, in the context of an M&A or
strategic review mandate, all available reasonable
alternatives warrant reasonable discussion and
- Communicate with management: In other
contexts, management can be a valuable resource to the
committee given management's intimate knowledge of
the day-to-day affairs of the business. In the context of an
M&A mandate, it is appropriate for members of management
to be involved in negotiations on behalf of, and subject to
the direction of, the special committee with potential
bidders or to act as intermediaries between the special
committee and potential bidders. Any interaction with
management should, however, be subject to consideration of
any conflict in the interests of management with those that
the committee is to protect.
- Document deliberations carefully: The
minutes of the committee's proceedings should reflect
the matters discussed and the advice obtained so that it is
clear that the special committee is focused on the important
issues and proceeds in a thorough and informed manner.
- Monitor shareholder reaction and the reaction of
other stakeholders: In reviewing the fairness and
reasonableness of the matter under consideration, the special
committee should be kept advised of any complaints received
from shareholders concerning the proposed transaction. The
committee may also consider the implications for other
stakeholders of the matter under consideration.
- Act even-handedly: A majority
shareholder should not be favoured over minority
- Consider timely disclosure requirements:
The committee may need to cause the company to issue press
releases in order to communicate with shareholders in
connection with material developments or, in unusual
circumstances, issue press releases itself.
- Ensure the adequacy of disclosure in applicable
disclosure documents: This will require a careful
review of drafts of the applicable disclosure documents
(including press releases, material change reports and
information circulars) and may require discussions with
management, advisors and other persons in order to resolve
any questions or uncertainties.
12. What can a special committee member do to protect against liability?
It is perhaps not surprising advice that the best way for a committee member to protect against liability is to ensure that his or her duties are properly discharged. That said, it is also recognised that special committees are often created in response to circumstances that are or may become contentious. Even in circumstances where the committee member acts appropriately in discharging his or her duty, the possibility remains that he or she may be subject to legal or regulatory proceedings which can be both costly and time consuming even if the director subject to those proceedings ultimately is vindicated. While potential legal exposure to such proceedings is an ongoing risk for directors, committee members can take some action to mitigate the risk of financial loss in the event that they become subject to those proceedings, though these actions are not unique to directors serving on a special committee.
Accordingly, it is prudent for directors to re-examine any indemnity in their favour in the company's by-laws or in contract. Where the director serves on a board of a company that is a subsidiary of another company, the director may wish to seek an indemnity from the parent company as well. In addition, the indemnification of the committee members may be included as a specific item in the committee's mandate.
Directors should also ensure that the directors' and officers' insurance policy of the company is reviewed. For example, some directors' and officers' insurance policies may exclude coverage in connection with non-arm's length transactions. Accordingly, directors may wish to determine whether additional coverage should be obtained in circumstances where, for example, a transaction involves the company's controlling shareholder.
In the context of an M&A transaction where a change of control may occur, directors should ensure that appropriate run-off coverage (also referred to as a "tail" policy) to protect against claims against the directors based on circumstances arising prior to the change of control transaction is in place, either through the company purchasing it directly or by ensuring that the acquiror of the business is obligated to do so. The directors in this situation should also take steps to ensure that the acquirer will not undertake activities to restrict or weaken the legal or practical effect of existing indemnification arrangements in favour of the directors. The trustees of an income trust may also wish to seek appropriate protections given that they may no longer have recourse to the trust assets to satisfy an indemnity claim depending on how the transaction is structured.
13. When should a special committee retain outside advisors?
Whether and when a special committee should retain outside advisors depends in large part on the context in which the committee has been established, the mandate of the committee and the expertise of its members. A special committee member should properly understand the various legal, financial, accounting and other issues that may arise in the course of the committee's mandate and make appropriate inquiries where these issues are not fully understood. One method of obtaining such understanding is for the special committee to engage expert advisors.
When engaging an expert advisor, the committee should review the qualifications of the advisor to perform the task for which the advisor is to be retained. The committee may wish to examine, among other things, the prospective advisor's experience in matters similar to the one for which the committee has been established and the resources available to the advisor. To the extent that time permits, it is prudent to consider, and request proposals from, more than one possible advisor prior to the selection of an advisor. Depending on the confidentiality of the committee's mandate, the committee should bear in mind that, in making a request for proposals, confidentiality could be compromised depending on certain factors, including the number of advisors solicited and the size of the industry in which the advisor operates.
In certain circumstances, such as in a going private transaction, it is customary for a special committee to retain legal and financial advisors who are independent. In those cases, a special committee should retain outside independent advisors as soon as possible following its establishment. For example, in an M&A context, a financial advisor is of critical importance as the advisor will carry out a number of roles, including assisting in determining appropriate value for the target, assisting in organizing and conducting an auction or market canvass if necessary and identifying other value maximizing alternatives. Outside the M&A context, a special committee may engage other experts, such as forensic accountants in the case of a committee mandated to conduct an internal investigation into accounting irregularities.
The benefits to be gained from obtaining outside independent advice for the special committee must be balanced against the costs. For example, a special committee may choose to rely on the advice of the company's existing legal counsel given counsel's familiarity with the business and affairs of the company. However, a committee should proceed with caution should it choose not to engage independent counsel as courts often look to the independence of the advice that was received by the committee. Should a committee choose to rely on the company's counsel for advice, the committee should periodically reassess whether independent counsel may be needed at a later stage in the process.
In any case where the committee retains outside advisors, the committee should directly negotiate the terms of engagement and should be empowered under its mandate to enter into engagement agreements with each of its advisors at fees negotiated by the committee and paid for by the company. The committee's deliberations concerning the engagement of its advisors should also be properly documented.
14. What is the role of the special committee's advisors?
The special committee's advisors should be retained to provide the committee with impartial advice and guidance in fulfilling the committee's mandate. In some circumstances, the advisor's role will be quite specific and its involvement substantial. For example, in an insider bid, the committee will generally be required to retain an independent financial advisor to prepare a formal valuation. In those circumstances, the committee also will retain independent legal counsel who may act as primary legal counsel on the transaction from the perspective of the target, will negotiate the terms of the target company's support, if such support is warranted, and will prepare the requisite disclosure documents. In the context of an internal investigation, the committee may retain forensic accountants or other investigative experts to review company records and may retain legal counsel to direct the investigation and to provide advice in connection with any interaction with regulators or public disclosure obligations arising from the investigation. In some cases in this context, legal counsel, as opposed to the committee, may formally retain the other experts in an effort to maintain privilege.
In other circumstances, the advisor may provide more general oversight and advise the committee only on issues as conflicts arise. For example, in the context of company-initiated auction of a public company, a special committee may retain its own legal counsel to provide advice in tandem with the company's legal counsel and to provide both a second opinion on certain matters and to advise on matters where the company's legal counsel may be conflicted. In other circumstances, the committee may rely generally on the advice of the financial advisor retained by the board of directors in connection with a transaction; however, the committee may at a later stage in the process retain its own financial advisor to provide a fairness opinion for a fixed fee with no success fee component.
1 While the term "special committee" is often used, such a committee also may be referred to as an "independent committee" or a "strategic committee". A special committee is established under the authority of the corporate statute applicable to the company, or, in the case of non-corporate issuers, the authority of the issuer's governing instrument, such as a declaration of trust. Section 102 of the Canada Business Corporations Act (the "CBCA") (and similar provisions in the applicable provincial corporate statutes) provides that, subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation. Section 115 of the CBCA permits the directors of a corporation, subject to certain specified restrictions, to appoint committees of directors and delegate to the committee any of the powers of the directors.
2 Subject to certain limited exceptions, a committee of independent directors must be established to oversee the preparation of an independent valuation in the case of a take-over bid made by an insider of a public company
3 Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions.
4 National Policy 58-201 of the Canadian Securities Administrators — Corporate Governance Guidelines. Except in the case of British Columbia, the independence requirements referred to in the Guidelines are incorporated from section 1.4 of Multilateral Instrument 52-110 of the Canadian Securities Administrators — Audit Committees.
5 As an example, see CBCA, s.122(1).
6 CW Shareholdings v. WIC Western International Communications Ltd. (1998), 160 D.L.R. (4th) 131 (CA) ("WIC").
8 Maple Leaf Foods v. Schneider Corp. (1998), 42 O.R. (3d) 177, (sub nom Pente Investment Management Ltd. v. Schneider Corp.) (CA).
9 Peoples Department Stores (Trustee of ) v. Wise,  3 S.C.R. 461.
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