In circumstances where a company issues a press release defending the actions of its board against accusations by dissident shareholders, the press release will not necessarily be considered a solicitation for the purposes of section 147 and 150 of the Canada Business Corporations Act, RSC 1985, c C-44 (the “CBCA”).

Smoothwater Capital Partners LP I v Equity Financial Holdings Inc., 2014 ONSC 324 (“Equity Financial”)

On the same day that Equity Financial Holdings Inc. (the “Company”) announced the date of its annual general and special meeting of the shareholders, the dissident shareholders, represented by Smoothwater, issued a proxy solicitation and press release openly criticizing the Company’s board of directors and the timing of the meeting.

The Company responded five days later with its own press release defending its board of directors and criticizing Smoothwater in turn for failing to engage the Company’s board in meaningful discussions prior to starting a costly and unnecessary proxy fight. At the time of the press release, the Company had not yet mailed the management information circular but advised in the press release it would provide the management information circular in connection with the annual and special meeting of the shareholders.

Justice McEwen of the Ontario Superior Court considered the “principal purpose” of the press release and concluded the purpose of any press release is fundamental to its characterization as a solicitation, emphasizing that “The Equity press release must be looked at on its own” (at para 12).

Although the definition of solicitation is interpreted broadly, the Court in Equity Financial emphasized the importance of context when determining whether a particular communication constitutes solicitation for the purposes of section 150 of the CBCA. Justice McEwen considered the press release in the context of its response to Smoothwater’s accusations, stating, “Reviewed in context it defends, amongst other things, its history, leadership and explains why it is combining the date of the Annual and Special Meeting of Shareholders” (at para 13).

Justice McEwen ruled the press release issued by the Company did not constitute solicitation of proxies because it was a single press release and its principal purpose was to defend the actions of its board and keep its shareholders informed. On its own, the fact the Company was in the midst of a proxy battle was not enough to qualify as solicitation under section 147 of the CBCA.

Implications for Corporations and Shareholders

The decision in Equity Financial recognizes the numerous exemptions and advantages available to dissident shareholders, and functions as a check on the resulting expansion of shareholder activism. The Court qualified its decision however, stating the Company was “entitled to respond to Smoothwater in a single press release. This is not to say that in the present circumstances a series of press releases could not constitute a solicitation” (at para 14).

While companies and reporting issuers involved in proxy disputes may take advantage of the Equity Financial decision to defend the actions of their boards against the accusations of dissident shareholders, they must remain mindful of how the press release fits within the larger context of the dispute.