The Canadian Securities Administrators (CSA) published Staff Notice 61-303 and Request for Comment (the Notice) on April 12, 2018, which outlines issues that the CSA has identified regarding the use of soliciting dealer fee arrangements in proxy contests and corporate transactions. The CSA has proposed no rule changes at this time and is seeking input generally and in response to specific questions (our experience in the past is that members of the CSA have taken different views on the use of soliciting dealer fees). However, it is clear that as a result of the recent use of this mechanism in the proxy contest for board control of Liquor Stores N.A. Ltd., there is renewed interest in these types of arrangements and their impact on market participants. Comments must be submitted by June 11, 2018.
Purpose of Soliciting Dealer Arrangements
Generally, soliciting dealer fee arrangements refer to agreements between an issuer and registered investment dealers under which the issuer agrees to pay the dealer(s) a fee in event that such dealer(s) successfully solicit securityholder support for a particular matter. Most often, these arrangements may be used to incentivize dealers to solicit securityholders to: (i) vote on a matter requiring securityholder approval; (ii) tender securities in connection with a takeover bid ; or (iii) participate in a rights offering, exercise rights to redeem or convert securities or, in connection with a corporate transaction , attain the quorum needed to amend documents affecting securityholders.
Under these arrangements it is common for the issuer's payment of fees to the dealer(s) to be contingent on the successful solicitation of securityholders by the dealer(s). In other words, unless a securityholder votes "for" a particular matter requiring securityholder approval no fees will be paid to the dealer(s) by the issuer. Further, it is standard practice in these arrangements that the fees paid are subject to a minimum or maximum value.
Use of Soliciting Dealer Fee Arrangements
These arrangements are common, and are not traditionally controversial, in the context of takeover bids and plans of arrangement, although our experience has been that in the context of a hostile takeover bid, the imposition of soliciting dealer fees has significantly increased the tender percentage.
However, such arrangements have also been used by issuers in Canada in proxy contests to solicit votes in favour of an incumbent board, and this use has caused controversy. In 2017, PointNorth Capital (to whom Bennett Jones was counsel) initiated a proxy contest to replace certain of the directors on the board of Liquor Stores N.A. Ltd. and previously, in 2013, JANA Partners initiated a similar proxy contest involving Agrium. In each case, the issuer offered to make payments to soliciting dealers only for votes cast in favour of the election of the issuer's incumbent board, and such payments would only be made if the incumbent board was re-elected. In Liquor Stores the payment of soliciting dealer fees was challenged before the Alberta Securities Commission, but that Commission allowed it to proceed. In Agrium, the company prevailed. In Liquor Stores, PointNorth prevailed despite the payment of soliciting dealer fees.
Rationales for Soliciting Dealer Fee Arrangements from the Issuer's Perspective
Issuers often encounter practical difficulties with reaching out to , and communicating directly with, retail investors who are objecting beneficial owners (OBOs) under applicable securities laws, and issuers view soliciting dealer arrangements as a means to incentivize dealers to communicate the issuer's message to retail OBOs. Communication with OBOs can be valuable to issuers because proxy solicitation firms retained by an issuer may be able to communicate with non-objecting beneficial owners, and may possess insights regarding significant security holders, but they are often unable to identify and communicate with retail OBOs.
Issues with Soliciting Dealer Arrangements
The public interest questions that arise from soliciting dealer arrangements affect the integrity of the tendering process or securityholder votes. The use of such arrangements to entrench the board and management may raise issues regarding the proper discharge of the fiduciary duties of directors. They also raise other securities regulatory issues, including from the perspective of the dealer, issues regarding the proper management of conflicts of interest as well as issues relating to securities laws governing proxy solicitations.
The Notice was published with a view to aiding the CSA in assessing whether additional guidance or rules in respect of those arrangements is appropriate. To that end, the CSA went out with 14 specific questions for comment. At this time, the likelihood of regulatory intervention cannot be predicted; however, it is safe to say that any soliciting dealer arrangements used going forward, particularly in the context of proxy battles, will be closely scrutinized.