Social media has very seldom been leveraged in Canadian proxy contests. One reason for this may be the lack of knowledge about its full potential. To address this reason, our first post in this series reviewed social media’s impact on public discourse and proxy contests in the U.S. and Canada.
Another reason for the limited use of social media in Canadian proxy contests is the lack of specific regulatory guidelines. Unlike in the U.S., in Canada there is no regulatory guidance on the use of social media to communicate with shareholders. This article reviews some legal considerations applicable to the use of social media in Canadian proxy contests.
Proxy Solicitation Rules (concern for board and activist)
It is critical to obtain legal advice prior to using social media to communicate with shareholders, particularly in the midst of a proxy contest. Any shareholder or the board may announce its position on social media regarding corporate governance issues, management, the company’s operations, or an upcoming vote provided that the announcement is not a “solicitation” for a proxy.
However, corporate statutes and securities legislation in Canada prohibit the solicitation of proxies unless the sender (board or activist) provides shareholders with an information circular containing prescribed information. Therefore, the communication should not request any shareholder action on a proxy.
Whether or not a communication crosses the line into illegal proxy solicitation is a fact-specific determination based on the “principal purpose” of that communication and the surrounding circumstances. For instance, inSmoothwater Capital Partners LP v. Equity Financial Holdings Inc., 2014 ONSC 324, the Court determined that a single press release by a board aimed at informing shareholders and responding to the activists’ apparently inaccurate statements was not a proxy solicitation. The Court cautioned that in the same circumstances, “a series of press releases” could constitute a solicitation.
To solicit proxies online, an activist may use the “broadcast exemption” under National Instrument 51-102.This exemption permits shareholders to solicit proxies over the internet without sending an information circular to shareholders subject to two limitations.
First, the broadcast must contain certain information and that information, together with a copy of any communication intended to be published, must be filed on SEDAR. Second, the broadcast exemption is only available to an activist nominating or proposing to nominate a director if an information circular regarding the proposed nominee(s) is filed on SEDAR and the communication refers to that information circular and discloses that it is filed on SEDAR.
The information that NI 51-102 requires in the online “broadcast”, while less onerous than an information circular, is lengthier than the transmission limits of certain social media (e.g. Twitter’s 140 character limit). The SEC has addressed such limitations in staff guidance allowing disclosure requirements to be satisfied through a hyperlink within the communication. In Canada, it is currently unclear whether a tweet directing shareholders to a website with the information prescribed by NI 51-102 would breach securities law. Depending on the circumstances, arguably, the policy goals of NI 51-102 would not be undermined by such a tweet. However, regulatory guidance is required for market participants to confidently use Twitter and other social media platforms to promote broadcasts exempted under NI 51-102.
Even with the foregoing restrictions, social media enables shareholders not affiliated with the board or the activist to amplify a particular message either through new communications or the retransmission of those previously made. Consider, for instance:
a shareholder not acting jointly or in concert (a factual determination) with an activist uses social media to support the activist’s existing campaign to replace the board
a shareholder re-tweets the board’s message soliciting proxies but drops the hyperlink to the disclosure
In the first example, provided the shareholder is not illegally soliciting proxies, the use of social media could provide the activist with a strategic advantage over the board. In the second example, the shareholder is arguably soliciting proxies on the board’s behalf but fails to retransmit the board’s complete message. Would this failure be attributed to the board in Canada? The SEC has addressed this issue, at least in the context of a securities offering, by noting that re-attribution will not take place where the original communication (the board’s disclosure in our second example) was compliant and the subsequent communication was made by a true third party (i.e. one not acting jointly or in concert). The retransmission issue is still an area of open debate in Canada.
Selective Disclosure (concern for board)
Generally speaking, social media should not be the exclusive means of communicating with shareholders during a proxy contest. Getting the message out through multiple channels is not a difficult sell. As an added incentive, there are legal concerns about the “selective disclosure” of material information.
National Policy 51-201 requires that material information about public companies be “generally disclosed”. For information to be generally disclosed, it must be disseminated in a manner calculated to effectively reach the marketplace and investors must receive a reasonable amount of time to analyze the information. The opposite — “selective disclosure” — occurs when a company discloses material non-public information to a limited group of stakeholders (media, analysts, institutional investors, other market professionals, or, potentially for example, via a tweet to the subset of its shareholders that use the social media platform) and not broadly to the investing public. The regulatory concern is that selective disclosure undermines confidence in the marketplace by potentially creating unequal access to information and opportunities for insider trading. By way of example, in Flag Resources, the Alberta Securities Commission was critical of the selective disclosure of information to certain shareholders rather than the capital markets broadly. The Commission reasoned that without information being generally disclosed, uninformed investors may make ill-advised investment decisions.
In our view, the risk of selective disclosure may be mitigated by using social media to promote material information already disseminated via traditional channels.
Misrepresentation Concerns (concern for board and activist)
As with traditional media, a board and activist should carefully consider the accuracy of the information shared on social media, including during a proxy contest. Consider the following scenarios:
- An activist tweets that a material contract signed by the company was secured through grafting. What if the tweet was untrue?
- An activist creates a slick YouTube video alleging that the board had entered into material agreements with parties related to the company’s largest shareholder, in breach of MI 61-101. What if the activist’s allegations were false?
- The board, in response to heavy criticism by an activist, tweets a “rosy picture” about its financial position. What if the board overstated the company’s position?
There are at least three potential implications to such misrepresentations.
First, the board (and perhaps activists) may be liable for misrepresentations on social media that cause an investor to trade in the company’s securities. Therefore, care must be exercised to ensure that the information on social media contains no untrue statement of material information and does not omit to state material information that is required to be stated or necessary in order to make any other statement therein not misleading in the light of the circumstances in which it was made.
Second, an activist may not be permitted to vote proxies at a shareholder meeting if the activist’s information circular contained a material misrepresentation. Although unprecedented, the same position may be taken to invalidate an activist’s proxies that were obtained while material misrepresentations were being promoted by the activist or a joint actor on social media.
Third, securities regulators may commence enforcement proceedings against the sender.
Defamation (concern for board and activist)
Proxy contests can be ‘no holds barred’ brawls with both sides trading sharp jabs. As parties become comfortable using social media to promote their position and correspondingly, to attack the other side’s record, they should bear in mind that social media, like traditional media, can form the basis of a defamation lawsuit. For instance, in Fuda v. Conn, an activist sued the company’s directors alleging that comments made in a management information circular were defamatory and intended to undermine his reputation. The Court found that the circular contained “false innuendoes” that damaged the plaintiff’s reputation. Although the circular was published only once, the information therein was “distributed broadly by being repeated on various sites on the Internet.”
Despite the regulatory vacuum, we expect social media to be increasingly leveraged in Canadian proxy contests. As we noted, social media can be used to communicate with shareholders subject to certain legal issues. Before harnessing the power of social media, a board or activist should carefully consider these legal issues with the benefit of legal advice. Once unleashed, social media can be a powerful medium to influence public discourse and proxy contests.