The Alberta Securities Commission (ASC) recently released its reasons in an application by PointNorth Capital Inc. et al (PointNorth) against Liquor Stores N.A. Ltd. (Liquor Stores).1This decision is the first of its kind—marking the first time a securities commission or court has addressed the legality of soliciting dealer fees in a proxy contest. Burnet, Duckworth & Palmer LLP represented Liquor Stores before the ASC and in the broader proxy contest.
Although there has been some public criticism of the use of soliciting dealer fees, particularly in the case of contested director elections, they do not violate securities laws, and, the ASC declined to exercise its public interest jurisdiction to prohibit or reprimand the practice. This decision confirms that a commission will be cautious in wielding its public interest jurisdiction when there has been no breach of securities laws; that it will only act where the transaction is "clearly abusive"; and that it will not be spurred into action based on mere speculation or unsupported inferences, requiring instead, proof of actual or potential harm.
In doing so, the ASC has signalled that it will safeguard against the unintended but serious consequences that would follow if the ASC, absent any contravention of securities law or policy, on an emergency application, reprimanded an issuer and its directors for lawful conduct that has seen prior practice.
Soliciting Dealer Fees in Canada
Soliciting dealer fees are not novel in Canada. At the time of the Liquor Store proxy contest, they had been used in at least 43 merger and acquisition transactions and 3 proxy contests.
Soliciting dealer fee arrangements originated in takeover bid transactions, where minimum tender conditions typically require the bidder to obtain the tender of at least 66 2/3 percent of outstanding shares. To reach this threshold, some bidders arrange for the formation of "soliciting dealer" groups, which typically receive compensation for every share they solicit to tender. Soliciting dealer fees are also often used when an M&A transaction proceeds by way of plan of arrangement, which requires that shareholders vote on the transaction rather than tendering to a bid.
Soliciting dealer fees are offered to broker-dealers as an incentive to reach out to their clients to seek instructions to tender to the bid or to vote in favour of that transaction. The reason for this incentive is simple. The shareholding system throws up barriers for issuers or bidders to contact many retail shareholders directly. In the case of shareholders that are objecting beneficial owners (OBOs), it is practically impossible. Incentivizing the intermediary brokers is one way for issuers and bidders to reach out to retail shareholders and get them to exercise their rights.
Soliciting dealer arrangements have also been used in proxy contests, where brokers are offered compensation to solicit proxies from clients. The highest profile of these took place in March 2013 when Agrium Corporation paid $0.25 for each share voted in favour of Agrium director nominees in a proxy contest with its largest shareholder, JANA Partners LLC. This drew significant media attention and public debate―with some sharp criticism of the practice.
Perhaps most prominently, Stephen Erlichman, the Executive Director for the Canadian Coalition for Good Governance, penned an op-ed piece in The Globe and Mail2 stating that "Agrium's payments ... certainly do not pass the "smell test" of what constitutes good governance."
Ultimately, Agrium successfully fended off JANA's challenge and elected its incumbent slate of nominees at its April 2013 AGM.
Despite the negative public commentary that arose from this 2013 contest, Canadian regulators remained silent. There were no policy statements, rules or regulations issued by securities commissions or major stock exchanges regarding the use of these kinds of compensation arrangements. While soliciting dealer fee arrangements continued to be used in the M&A context—11 since the Agrium contest—no such arrangement had been used in the arena of proxy contests until the recent contest over the election of the Liquor Stores Board.
The Liquor Stores' Proxy Contest
Liquor Stores is one of North America's largest publicly traded liquor speciality retailers. Through its subsidiaries, Liquor Stores owns or operates over 250 retail liquor stores.
In November 2016, PointNorth acquired approximately 10 percent of Liquor Stores' outstanding shares. A proxy contest unfolded in which both groups, through a series of circulars and press releases, sought to convince shareholders and investment advisors of the merits of their proposed strategy and strength of their slate.
Following the filing of its Proxy Circular, Liquor Stores publicly announced the formation of a soliciting dealer group (the Soliciting Dealer Group Plan). It issued a supplement to its Proxy Circular disclosing the details of this arrangement: brokers would be paid $0.05 for each share solicited to vote in favour of Liquor Stores' slate of nominees. Payment of these fees would only be due if the Liquor Stores' slate was elected.
Liquor Stores offered 3 main reasons for implementing the Soliciting Dealer Group Plan:
- Approximately 58 percent of Liquor Stores' common shares were held by retail investors, with the vast majority comprised of OBOs—meaning that solicitation of proxies from OBOs required the use of broker intermediaries.
- The Board had determined that the incumbent slate and strategic plan was superior to PointNorth's alternatives, and that the implementation of PointNorth's plan would destroy approximately $2.65 per share of value.
- The Board noted that brokers owe independent professional duties to their shareholder clients and it was expected that they would act in accordance with those duties when advising and soliciting retail shareholders.
PointNorth's response was swift and critical. It immediately issued a press release entitled: "Exposing Liquor Stores N.A.'s Vote Buying Scheme". It painted the soliciting dealer arrangement as an illegal "act of desperation" and called on Liquor Stores to terminate the agreement.
On June 13, 2017 (3 days before the proxy cut off date), PointNorth applied to the ASC to invoke the Commission's public interest jurisdiction to, among other things, terminate the Soliciting Dealer Group Plan, reprimand the Liquor Stores Board for approving the Soliciting Dealer Group Plan and require the company to press release this reprimand.
Alberta Securities Commission Rules on Novel Issue
The ASC dismissed PointNorth's application, finding that neither the Soliciting Dealer Group Plan, nor Liquor Stores' actions in implementing it, were clearly abusive.
Canadian securities commissions have held for decades that they have the jurisdiction to intervene and restrain transactions under their public interest jurisdiction where the transaction is clearly abusive of investors and of the capital markets, even in the absence of a breach of securities law.
PointNorth argued for a lower standard: the ASC should intervene if securities laws are silent on the topic but the conduct is nonetheless contrary to the "animating principles" of securities laws.
The ASC disagreed with PointNorth, concluding that the appropriate test remains the "clearly abusive" test when securities laws articulate "specific acts which constitute misconduct".3 It reasoned that soliciting dealer arrangements are not proscribed despite previous use and some public criticism, and in these circumstances, it would create uncertainty (in this context and beyond) to start basing decisions on a lower standard.
After concluding that the appropriate test is whether the transaction is clearly abusive of investors and the public, the ASC found that PointNorth failed to provide any evidence of actual or even potential harm to shareholders or of the capital markets in general.
PointNorth's argument was premised on a sort of "smell test". It suggested that "regulators have preserved for themselves the ability to recognize abusive conduct when they see it and impose relief when the public interest demands it."4 It argued that the soliciting dealer fees "single-handedly created a conflict of interest for brokers and dealers", turning them into "partisan solicitors and vote-takers."5
PointNorth made these arguments in the absence of any evidence of misconduct by brokers. The ASC held that this fell far short of the clear, convincing and cogent evidence required in securities commission proceedings:
We are not convinced by PointNorth's argument. ... [W]e are being asked to assume, without evidence, that brokers would violate their legal and ethical duties – essentially allowing themselves to be corrupted – for the possibility of earning $0.05 per share voted a certain way. We are also asked to assume that the Liquor Stores Board's members would improperly use corporate funds to put their interests ahead of their fiduciary duties.6
Canadian securities commissions have repeatedly held that market participants should know in advance what the rules of the game are and how to guide their conduct―but that securities commissions are nonetheless willing to create new rules in the exercise of their public interest jurisdiction in the case of novel, not previously contemplated, transactions that require an immediate response.
The ASC affirmed that view, noting that securities commissions have not acted in the past to curtail the practice of soliciting dealer fees during proxy contests, and have not undertaken any sort of policy reform initiatives to change the practice:
Although there was some unfavourable public commentary a few years ago in the course of a different proxy contest, securities regulators have not banned the practice of which PointNorth complained here. We do not accept that our public interest mandate includes imposing new policy requirements in such circumstances, which would essentially be the outcome here if we were to grant the orders sought by PointNorth. We are particularly mindful that the imposition of any new policy requirements addressing potential dealer conflict issues may well have broader and unintended consequences.7
It is generally improvident for securities commissions to create new policy on an ad hoc basis, on a compressed time frame with limited submissions, and input from only two parties. In setting down rules, it is much preferable for securities commissions―essentially acting in their delegated legislative capacity―to solicit input from all market participants.
Footnotes
1 Re PointNorth Capital Inc., 2017 ABASC 121 (PointNorth).
2 Stephen Erlichman, "Agrium payments don't pass the 'smell test'", The Globe and Mail (July 4, 2013).
3 PointNorth, supra at para. 36.
4 PointNorth, supra at para. 44.
5 PointNorth, supra at para. 46.
6 PointNorth, supra at para. 49.
7 PointNorth, supra at para. 51.
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