While advance notice policies have been utilized by issuers in the U.S. for quite some time, they are still relatively new to the Canadian market. As a result, the Canadian jurisprudence on their use and interpretation continues to develop.
The Ontario Superior Court of Justice may have recently added some uncertainty when it granted a declaration in favour of Orange Capital, finding that the investment firm had complied with Partners REIT's advance notice policy in respect of the time frame for nominating trustees. In light of its finding that Orange Capital had complied with the policy, the Court declined to rule on the validity of the policy itself. Orange Capital had been seeking a declaration that the policy was of no force or effect, as the board had not submitted it for approval of unitholders.
As we discussed in an earlier post, Orange Capital launched a tender offer in May to purchase up to 10% of the outstanding units of Partners in an attempt to acquire enough proxy votes to get a new slate of independent trustees appointed to Partners' board. Under the terms of the tender offer, tendering unitholders were also required to deposit proxies appointing Orange Capital as proxy holder, for all deposited units, regardless of the number of deposited units actually taken up and paid for by Orange Capital.
Subsequent to discussions with the OSC, Orange Capital clarified certain aspects of its tender offer. Specifically, the additional details and conditions set out in the subsequent release by Orange Capital suggest that the OSC sought to impose aspects of the take-over regime in the immediate situation.
Background
On April 21, 2014 Partners filed notice of its 2014 annual and special meeting to be held on June 26, with a record date of May 16. Pursuant to the terms of the REIT's advance notice policy, nominations for trustees were required to be made between 65 and 30 days prior to the meeting, namely between April 22 and May 27.
On May 28, Orange Capital announced its intention to nominate trustees. On May 29, the REIT postponed the meeting to July 15 while maintaining the record date.
The advance notice policy
According to section 3 of the REIT's advance notice policy adopted in its Declaration of Trust:
To be timely, a Nominating Unitholder's notice to the Chairman of the Trust must be made:
(a) in the case of an annual meeting of unit holders, not less than 30 nor more than 65 days prior to the date of the annual meeting of unit holders; provided, however, that in the event that the annual meeting of unit holders is called for a date that is less than 50 days after the date (the "Notice Date") on which the first Public Announcement (as defined below) of the date of the annual meeting was made, notice by the Nominating Unitholder may be made not later than the close of business on the tenth (10th) day following the later of (i) the Notice Date and (ii) the first Public Announcement of the amendment to the Declaration of Trust pursuant to which these Nomination Provisions become part of the Declaration of Trust...
In no event shall adjournment or postponement of a meeting of unit holders or the announcement thereof commence a new time period for the giving of a Nominating Unitholder's notice as described above. (emphasis added)
Since no nominations were received during the nomination window triggered by the original meeting date of June 26, the REIT took the position that Orange Capital's nominees need not be considered.
According to Orange Capital, the advance notice policy required that nominations be made between 30 and 65 days prior to the date of the annual meeting. Orange Capital thus argued that the nomination window was triggered by the actual meeting date rather than the originally scheduled date. According to Orange Capital, the italicized portion of the advance notice provision above (the "proviso") was simply intended to relieve a nominating unitholder from having to repeat the nomination process in the case a meeting was postponed (i.e., prevent the advance notice from becoming "stale dated"). According to the REIT, however, the proviso was intended to exclude further nominations in cases of postponed meetings and to provide the REIT with certainty as to potential nominations.
The Court's decision
Ultimately, the Court found that the plain meaning and the policy rationale behind the advance notice policy favoured Orange Capital's interpretation.
First, according to the Court, as set out in the REIT's policy the nomination window was triggered based on the "date of the annual meeting", rather than the "scheduled date" of the meeting or the date the meeting was "called". The court specifically distinguished the wording of the nomination window trigger with the wording in respect of meetings that are called for a date less than 50 days from the notice date. According to the Court, "[i]f it had been intended that the same concept was to apply in respect of meetings called 50 days or more from the notice date, the Declaration of Trust would have used that language."
Second, the Court found that advance notice policies are generally intended to operate to shield management from ambush, and not as a "sword in the hands of management to exclude nominations given on ample notice" or as a mechanism to "buy time to develop a strategy for defeating a dissident shareholder group." As such, the court found Orange's interpretation consistent with the purpose of the advance notice policy.
The Court also found that under the REIT's interpretation, nominations would not be permissible after the initial nomination window closed even where a shareholder meeting was postponed due to a material development that called into question the suitability of existing directors. In the case of a meeting being called on short notice and resulting in a 10-day nomination window under the advance notice policy, later nominations would not be permitted even where a postponed meeting made a longer nomination period possible.
Finally, the court found that any ambiguity in respect of the provision should be resolved in favour of the more commercially reasonable interpretation. In the view of the Court, the more commercially reasonable interpretation was the one that supported unitholder voting rights, namely the interpretation that the proviso operated to prevent nominations becoming stale rather than prohibiting new nominations.
Further thoughts
The proviso in question was not novel to the REIT and is relatively common in advance notice bylaws or policies adopted by both U.S. and Canadian issuers. The Court's decision, arguably, raises more questions than it answers and may, therefore, not be the last word with respect to interpretation of such provisions.
As discussed by the B.C. Superior Court in Northern Minerals Investments Corp. v. Mundoro Capital Inc., advance notice policies help to ensure "an orderly nomination process" and that shareholders are adequately informed of the issues in advance of a meeting. Under the Ontario Court's interpretation of Partners REIT's advance notice policy, however, issuers that decide to postpone a meeting, even for a short time and for reasons unrelated to director nominations, could reopen themselves to the turmoil of a proxy battle. More precise drafting to avoid any ambiguities should help. Even greater clarity to require that nominations be made during a window triggered by the date of the meeting as originally scheduled could potentially result in a similar finding due to the Court's reasoning in respect of the policy rationale for the adoption of such policies.
Further, while the proviso dealt with both adjournments and postponements, the distinction between the two cannot be ignored and (while not at issue in the REIT's case) may prove to be an important difference. Under the Court's reasoning, one might be inclined to agree that the policy rationale underlying an advance notice policy supports a re-opening of the nomination window in the event of a postponement. In fact, if the proviso successfully prevented further nominations, a postponement could conceivably be used as a tactic to stretch the advance nomination period beyond the prescribed (and generally accepted) outside limit of 60 days. On the other hand, given that an adjournment involves (at law) the continuation of the original meeting for which further notice is generally not required to be provided, it may be more difficult to understand how the policy rationale would apply to permit new nominees to be added to the adjourned meeting.
Proxy advisory firm ISS, meanwhile, supports the adoption of advance notice requirements where proposals "provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible". According to ISS, a reasonable nomination deadline would be not more than 65 days and not fewer than 30 days prior to the meeting date. Recently, we have learned that ISS has recommended a vote against the adopting of advance notice by-laws or policies that do not allow for the commencement of a new time period in the event of an adjournment or postponement. This would seem to represent a change in approach by ISS, given the common inclusion of the proviso by U.S. and, until now, Canadian companies, presumably in many cases with the positive recommendation of ISS. This particular issue is also not specially addressed in ISS's existing Canadian or U.S. policies. Regardless, it appears that by-laws that include this clause may now be drawing negative votes from shareholders.
Further, in its 2014 Canadian Proxy Voting Guidelines for TSX-listed and venture companies, ISS specifically states that it will generally recommend voting against advance notice policies if the board is able to "only waive a portion of the advance notice provisions under the policy or by-law in its sole discretion." While ISS' language may be somewhat ambiguous, conceivably the intent is to ensure that the board may waive any provision of the by-law or policy in its discretion, as opposed to restricting the board to having to waive it in its entirety. The latter position arguably narrows any scope for flexibility in the hands of the board, given that a board would be prevented from waiving only the proviso (where it was drafted in manner to successfully prevent an extension of the nomination window) to allow for further nominations in appropriate circumstances. Retaining such flexibility may be one way for a board to strike the proper balance without undue prejudice to late nominees. Another consideration might be additions to the proviso itself, to clarify that it applies in respect of late nominations and not to stale date those received within the original window.
It remains to be seen whether the decision of the Court and the position of ISS will limit the ability of issuers to fully exploit the potential of advance notice policies. A number of issuers have policies in place that feature the language that is now objected to by ISS; policies that have been approved by shareholders and so will presumably not come forward again for consideration. While an issuer could potentially address the Court's concerns by implementing a policy with clearer language, interpretation questions will inevitably continue to evolve as boards and nominating shareholders, as well as courts and third parties such as ISS, continue to develop their experience and understanding of such policies in general and in response to specific situations.
This article is the second of a two-part series on the recent Orange Capital Tender offer for Partners REIT units
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