Canadian provincial securities laws generally require prompt early warning disclosure when any person acquires beneficial ownership of, or the power to exercise control or direction over, 10% or more of a class of voting or equity securities of a public company, as well as subsequent 2% increases. A proposed amendment by the Canadian Securities Administrators, not yet scheduled for implementation, would reduce the initial disclosure threshold from 10% to 5%, and also require disclosure of 2% decreases. In calculating the number of securities owned or controlled, the acquiring person must include any securities owned or controlled by others with whom it is acting jointly or in concert, and such joint actors must be identified in the disclosure.
A recent Alberta court decision has provided new guidance on when shareholders may be considered to be acting "jointly or in concert", thus potentially triggering disclosure obligations. In Genesis Land Development Corp. v. Smoothwater Capital Corporation, Justice Barbara Romaine of the Court of Queen's Bench found that an activist shareholder had failed to comply with the early warning reporting system and disclose that it had been acting jointly or in concert with certain other shareholders as it sought to gain control of the Genesis board of directors.
ACTIONS LEADING UP TO THE PROXY DISPUTE
The facts of the Genesis case are complex, and certain key points were in dispute among the parties. In its decision, the Court found that:
- Beginning in 2012, Liberty Street Capital, which held 2.85% of Genesis, attempted to have two of its principals, Edwin Nordholm and Louden Owen, elected to the Genesis board.
- Garfield Mitchell (Garfield) was the largest shareholder of Genesis and the sole owner of Smoothwater Capital Corporation. In 2012, Garfield held 16.5% of Genesis. His early warning report on file indicated he acquired the shares for investment purposes and did not identify any joint actors.
- Mark Mitchell (Mark) is Garfield's brother, and is a director of Genesis and the chair of its governance committee. The governance committee is tasked with recommending directors for election to the Genesis board. At the time of the Court hearing, Mark held 9.27% of Genesis.
- In late 2012, Liberty indirectly informed Garfield that it wanted to change certain of the directors on the Genesis board. Garfield and Mark both acquired additional shares of Genesis between March and May 2013.
- In May 2013, Smoothwater issued a press release entitled "Launch of Activist Investor", indicating that it had acquired 22.07% of Genesis and identified initiatives to improve the share value of Genesis. Garfield subsequently transferred substantially all of his Genesis shares to Smoothwater, but did not file an updated early warning report.
- On July 6, Mark proposed a new slate of directors to the governance committee of Genesis which included himself, the two Liberty principals Owen and Nordholm, and the CEO of Smoothwater, Stephen Griggs. The governance committee rejected the new slate and resolved to recommend that the board remain as currently constituted.
- On July 8, two days after the governance committee decision, Mark, Garfield, Griggs, Owen, Nordholm and proxy solicitation firm Kingsdale participated in a conference call. During this call, Mark advised the group of the governance committee's decision to recommend the current board remain in place. This call was followed by several others.
- On July 17, Liberty provided Smoothwater with a draft dissident proxy circular. This draft eventually became Smoothwater's dissident proxy circular.
- On July 26, Smoothwater, Liberty, Nordholm and Garfield executed a voting support agreement whereby they agreed to vote their shares in accordance with Smoothwater's recommendations. Mark did not sign the voting support agreement.
- That same day, Garfield and Smoothwater filed separate early warning reports reflecting the transfer of shares to Smoothwater which had occurred in May. Neither report disclosed any joint actors or the voting agreement executed that day, although the Smoothwater report did disclose that it intended to file a dissident proxy circular.
- Smoothwater's dissident proxy circular was released three days later on July 29. The circular disclosed the voting support agreement, but not that any persons were acting jointly or in concert with Smoothwater.
ACTING JOINTLY OR IN CONCERT
The concept of acting "jointly or in concert" is set out in applicable provincial securities legislation, although the requirements are largely harmonized across Canada. In Alberta, the applicable rule is Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids. While it is a question of fact, persons are deemed under the rule to be acting jointly or in concert with an "offeror" where, as a result of any agreement, commitment or understanding, they acquire or offer to acquire securities of the same class, and are presumed to be acting jointly or in concert where they intend to exercise jointly or in concert any voting rights.
The respondents submitted to the Court that, based on their interpretation of the instrument, the issue of acting "jointly or in concert" was only relevant in a take-over bid context or in connection with another agreement to acquire shares. Since Smoothwater was only seeking to change the composition of the board of directors, by extension none of the other respondents could be acting jointly or in concert.
While acknowledging an ambiguity in the law, the Court disagreed, stating that early warning disclosure is required where any person acquires beneficial ownership of, or control or direction over, more than 10% of a class of securities of an issuer. This includes disclosure of any persons acting jointly or in concert with the acquiror if there is any "agreement, commitment or understanding" to "exercise voting rights" in respect of the issuer. The subject matter of the agreement, commitment or understanding does not need to involve a take-over bid or other acquisition of shares.
The Court also provided guidance on when parties will be considered to be acting jointly or in concert, noting that it is a question of fact, and that the agreement, commitment or understanding need not be formal or written. Circumstantial evidence, such as family relationships, communications between the parties and attendance at meetings together can be taken into account in determining whether the parties were making a concerted effort to bring about a specified objective.
Based on its factual findings above, the Court held that Liberty/Nordholm were conclusively acting jointly or in concert with Smoothwater/Garfield beginning July 8, and possibly earlier. The Court pointed to their participation in the conference calls with Kingsdale, sharing the draft dissident proxy circular, and ultimately the signed voting support agreement.
Mark's position was less clear, but the Court found that his disclosure of the governance committee proceedings during the July 8 conference call, and his participation in that call in the presence of Kingsdale, were not "neutral acts". Ultimately, even if there was no formal agreement, there was an understanding that Mark would support the alternate slate of directors and he was therefore acting jointly or in concert with the others.
The respondents also made the argument that, even if they were acting jointly or in concert, the existing public disclosure was sufficient to ensure that no shareholder was misled about the election. They pointed to Smoothwater's dissident proxy circular which disclosed the voting support agreement, and to press releases issued by Genesis alleging the parties were joint actors.
Again the Court disagreed, noting that the dissident proxy circular did not disclose Mark's status as a joint actor, and that Smoothwater's early warning report failed to disclose any joint actors or aggregate the shares held by the other joint actors with its holdings. Furthermore, the respondents had publicly denied that they were joint actors.
The respondents also suggested that better disclosure would make no difference to shareholders in deciding which slate of directors to accept. The Court refused to make that determination, saying it cannot "prejudge" what difference proper disclosure would have made.
Of particular note, the Court commented that Smoothwater would have had a positive obligation to file an updated early warning report when it began acting jointly or in concert, as the early warning requirements mandate an update if there is a "change in material fact" in a prior report. By implication, the Court suggested that commencing to act jointly or in concert with other persons, if not previously disclosed, is a "change in material fact" requiring a new early warning report.
Genesis had sought an order disentitling the respondents from voting their shares at the Genesis annual general meeting. The Court declined, stating that while securities legislation provided it with wide discretion in fashioning an appropriate remedy, "the surgery should be done with a scalpel, and not a battle axe". The Court instead postponed the Genesis meeting for one month to allow the respondents to correct their disclosure so shareholders would be fully informed during the proxy solicitation process. The Court agreed with a submission by Genesis that the length of the meeting postponement should be roughly consistent with the time period that the joint actor disclosure had been delayed.