Shareholder activism is on the rise in Canada. As Canadian issuers wrestle with activist shareholders, the advance notice policy has become an important tool to protect companies from activist shareholders who might otherwise attempt to ambush a shareholders meeting by quietly collecting proxies and making a surprise motion from the floor to nominate directors.
To deal with this very real threat to corporate control, at least three Canadian companies recently have adopted advance notice policies – Mundoro Capital, our client MAG Silver and most recently Bell Copper. Such a policy, which is effective upon adoption by the board, requires any person proposing to nominate a director for election at a meeting of shareholders to provide the company with advance notice of, and prescribed details concerning, any such proposed nominee. Unless proper notice is given to the company in accordance with the prescribed notice period, any such proposed nominee is ineligible for election at the shareholders meeting. Each of Mundoro Capital and MAG Silver put its advance notice policy to shareholders for approval, on the basis that the policy would terminate on expiry of the shareholders meeting (but after the election of directors) if not approved by shareholders at that meeting.
For companies incorporated in jurisdictions outside of British Columbia, advance notice policies can be implemented by the board through a by-law amendment with immediate effect, which would then need to be confirmed by ordinary resolution of the shareholders at the next shareholders meeting. In British Columbia, where companies have only articles, proceeding in this manner would require a special resolution of shareholders to confirm the amendment to the articles of the company. For that reason, it likely is more sensible for British Columbia companies to proceed through board adoption of the policy.
The advance notice policy device has now received endorsement from the Supreme Court of British Columbia as well as the two leading proxy advisory firms – ISS and Glass Lewis.
On July 20, 2012, Mr. Justice R. Punnett of the Supreme Court of British Columbia upheld the advance notice policy adopted by the board of Mundoro Capital in his decision in Northern Minerals Investment Corp. v. Mundoro Capital Inc. In Mundoro, the court rejected Northern Minerals' argument that directors of a British Columbia company do not have any powers that are not specifically granted to them in the corporation's articles or the British Columbia corporate statute. Instead, the Court found that the Mundoro board had acted reasonably and within its powers in implementing the policy. In reaching its decision, the court noted the following key factors that evidenced the "good faith and reasonableness" of the policy:
- the policy gave the Mundoro board discretion to waive any requirement in the policy, which discretion can be reviewed by a court; and
- the company intended to seek shareholder approval of the policy at its next shareholders meeting.
Following the Mundoro decision, at least two other Canadian issuers have implemented an advance notice policy. Davies' client MAG Silver introduced a similar policy that on October 5, 2012 was endorsed by a vote of 99.56% of the shares voting on the policy at its annual general meeting. Importantly, both ISS and Glass Lewis recommended that their subscribers vote in favour of MAG's policy. These proxy advisory firms confirmed the legitimacy of these policies as an important tool to:
- provide a reasonable framework for shareholders to nominate directors (ISS);
- ensure that information regarding shareholder nominated directors is distributed in a timely and adequate manner (ISS); and
- avoid the potentially negative impact a stealth proxy fight can have where a relatively small group of shareholders take control of a company's board without paying any premium for such control and where other shareholders (if voting by proxy) have no ability to evaluate and vote on any directors nominated by the dissident shareholder (Glass Lewis).
Erecting and maintaining responsible and viable defences against unexpected threats to corporate control requires a careful and ongoing assessment of risks and the development of strategic responses to those risks. For many Canadian public companies, the adoption of properly constructed advance notice provisions, either through a board policy or through by-law amendments, would be well advised.