Following some controversy arising from the use of "soliciting dealer arrangements" in recent proxy contests, the Canadian Securities Administrators (the "CSA") have released a staff notice and request for comment (the "Staff Notice") seeking a range of general information from market participants about their prevalence and use, as well as the market's views on their appropriateness. The CSA have not proposed any specific new rules or guidance, but their interest in the subject should raise expectations of increasing scrutiny and potential regulation.
Soliciting dealer arrangements ("SDAs") are agreements under which an issuer agrees to pay a fee to one or more brokers in exchange for those brokers soliciting their clients to vote on a resolution or tender to a takeover bid. While SDAs are commonly used in public M&A transactions, some institutional shareholders, proxy advisory firms and corporate governance organizations have criticized their use, citing both securities and corporate law concerns, particularly in light of their more recent use in proxy contests.
Defenders of SDAs often cite the inability of issuers to contact those beneficial shareholders who have objected to their ownership information being disclosed by their brokers. Because an issuer can only contact these "objecting beneficial owners", or "OBOs", through their brokers, a SDA allows an issuer to motivate brokers financially to facilitate a solicitation. However, SDAs can raise a number of legal issues, relating to potential conflicts of interest for soliciting dealers (who have obligations to their clients), the restrictions on proxy solicitation under securities laws, and whether they might be so abusive of the capital markets as to trigger the public interest jurisdiction of the regulators. In addition, SDAs may raise issues relating to directors' corporate duties, which may be heightened in the context of a proxy contest. The questions in the Staff Notice are aimed at these issues.
Two recent proxy contests have highlighted these concerns. In the 2013 proxy contest between Agrium Corporation ("Agrium") and Jana Partners LLC ("Jana"), Agrium entered into a SDA to solicit votes in favour of its board of directors, which Jana had sought to replace. Agrium agreed to pay a fee of $0.25 per share, with a minimum of $100 and a maximum of $1,500 per beneficial owner, on the condition that payment would only be made if the shareholder voted for all of Agrium's nominees and those nominees were ultimately elected. This arrangement, once discovered by Jana, became the subject of much controversy in the media, but was not considered by the securities regulators or the courts.
Similarly, in the 2017 proxy contest between Liquor Stores N.A. Ltd. ("Liquor Stores") and PointNorth Capital, Liquor Stores entered into a SDA to have votes solicited in favour of its board. Liquor Stores agreed to pay a flat fee to an investment dealer to form a soliciting dealer group and to pay $0.05 per vote, but only where the shareholder voted in favour of management's slate. PointNorth Capital applied to the Alberta Securities Commission (the "ASC") for a decision that this SDA was contrary to the "public interest". The ASC, confirming that the exercise of its public interest jurisdiction requires conduct that is "clearly abusive" to shareholders and the capital markets, rejected the application. However, its decision was based largely on a lack of evidence to support the extraordinary use of its public interest powers, not on an implicit approval of SDAs.
The emergence of SDAs in proxy contests, and the controversy that has surrounded them, appear to have piqued regulatory interest. While it is unclear whether this Staff Notice will result in the adoption of new rules or guidance, market participants should be prepared for further regulatory response. Comments on the questions in the Staff Notice must be submitted to the CSA by June 11, 2018.
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