During a proxy contest, strategic consideration should be given to strictly abiding by proxy solicitation rules and hawkishly assessing whether your opponent is doing the same. A recent decision provides guidance on factors that a court will consider in determining a seldom litigated issue – when is communication by the company during a proxy contest an illegal proxy solicitation?
Generally speaking, corporate statutes in Canada prohibit the solicitation of proxies unless the sender (board or dissident) provides shareholders with a proxy circular containing prescribed information. Under the Canada Business Corporations Act, “solicitation” is broadly defined to include communication with shareholders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy”.
In Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc., 2014 ONSC 324, the board of Equity– following the requisition of a shareholder meeting and proxy solicitation by a dissident shareholder — issued a press release defending the board’s historical actions and responding to criticisms by the dissident Smoothwater. Smoothwater alleged that Equity’s press release was calculated to result in the procurement or withholding of proxies. At the time, Equity had not sent a management information circular.
The Court determined that Equity’s press release “stopped short of requesting proxies”, explaining that:
- The mere fact that Smoothwater had commenced the solicitation process did not mean that Equity’s press release constituted a proxy solicitation. Equity’s press release had to be analyzed on its own merits;
- The “principal purpose” of Equity’s press release was to provide shareholders with certain explanations (for instance, why Equity combined a special and annual shareholder meeting) and to defend its historical position, not to solicit proxies. Equity had argued that its press release was intended to address Smoothwater’s inaccurate statements and keep its shareholders informed at a critical time;
- Equity’s press release did not encourage shareholders to provide Equity with proxies, but rather, advised them that a management information circular would be forthcoming; and
- In the circumstances, Equity was entitled to respond to Smoothwater in a single press release. The Court cautioned that in the same circumstances, “a series of press releases” could constitute a solicitation.
The key takeaway from Equity is that special consideration should be given to all communication with shareholders before issuing a proxy circular. Whether or not a communication crosses the line into illegal proxy solicitation is a fact-specific determination of the “principal purpose” of that communication and the circumstances surrounding its transmission. Ongoing legal advice is critical because each communication will be assessed on its own merits, and in the context of other communications already made.