In its recent PointNorth Capital Inc. decision, the Alberta Securities Commission (ASC) was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into by the issuer, Liquor Stores N.A. Ltd., in the context of a proxy fight. The arrangement was intended to address management's constrained ability to solicit proxies due to the fact that many of the shareholders were "objecting beneficial owners" who could only be contacted indirectly through brokers.
The ASC dismissed the application by dissident shareholders of Liquor Stores, the PointNorth limited partnerships, for orders requiring Liquor Stores to terminate the arrangement, which involved payment to a group of IIROC member dealers to solicit shareholder votes in favour of the incumbent slate of directors at an upcoming shareholders meeting.
Pursuant to the arrangement, Liquor Stores agreed (1) to pay a Dealer Manager a work fee of $100,000 for services rendered in connection with the formation and management of a Soliciting Dealer Group, and (2) a solicitation fee of $0.05 per common share to any member of the Soliciting Dealer Group that facilitated the valid voting by a retail beneficial shareholder of his or her shares in support of each member of the Liquor Store's slate of directors, to a maximum of $1,500 per beneficial shareholder.
Conceding that the arrangement was not specifically prohibited under Alberta securities laws, the PointNorth applicants asked the ASC to exercise its general "public interest jurisdiction" under s. 198(1) of the Alberta Securities Act to make the orders requested.
The Commission declined to do so, concluding that the Plan was not "clearly abusive" of Liquor Stores' shareholders or the capital markets in general. In particular, there was no evidence that anyone was actually harmed by the arrangement. In the absence of evidence, the Commission refused to assume that members of the dealer group would violate their legal and ethical duties to their clients for the possibility of earning $.05 per share voted in a particular manner, or that members of the board of Liquor Stores would improperly use corporate funds to put their interests ahead of their fiduciary duties.
Following the decision of the Ontario Securities Commission in Re Canadian Tire Corp. and decisions of the ASC in Re Perpetual Energy Inc. and Re ARC Equity Management (Fund 4) Ltd., the ASC affirmed that in the absence of a breach of securities law, its public interest jurisdiction should only be exercised to address a clearly demonstrated abuse of investors and the integrity of the capital markets.
It rejected the PointNorth applicants' submission that a standard lower than that of "clearly abusive" ought to apply, given that Alberta securities law was silent on the propriety of such soliciting arrangements. Alberta securities laws set out comprehensive and detailed requirements for proxy solicitation and the conduct of brokers, and did not proscribe soliciting dealer arrangements. In the circumstances, it would create considerable uncertainty if the Commission was to base its decision on a standard lower than that of "clearly abusive".
The ASC's approval of the soliciting arrangement in issue provides a useful precedent for proxy contests in Canada. Its comments about the circumstances in which it will exercise its public interest power in the absence of a breach of securities law or evidence of demonstrable harm indicate that it will continue to exercise restraint and avoid use of that jurisdiction to impose new policy requirements on market participants.
This commentary was originally posted on Norton Rose Fulbright's Securities Litigation and Enforcement Blog.
The authors would like to thank Milomir Strbac, Summer Student, for his contribution to this article.
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