The 2012 proxy season was an active one in Canada and provided valuable guidance for both issuers and shareholders to consider as the 2013 proxy season approaches. The 2012 proxy season provided two primary lessons. First, advance notice provisions have gained a foothold in Canada and look to be a feature of proxy contests for the foreseeable future. It is important that these provisions be understood by issuers and investors alike. Second, the tabulation of proxies, once the technical preserve of the shareholder services firms, is now very much a mainstream battle ground in proxy contests.
Advance Notice Provisions
Advance notice provisions are: amendments to corporate by-laws or articles; or policies adopted by boards of directors that require notice of director nominations and detailed information about nominees and dissident shareholders to be provided to management in advance of an annual or special meeting. In Canada, advance notice provisions generally require that notice of any director nominations be provided to management of an issuer within a 30- to 65-day period prior to the annual or special meeting. Longer notice provisions of up to 120 days prior to the anniversary date of the preceding annual meeting have been adopted in the U.S.
Advance notice provisions can be an effective defensive tool in a proxy contest as dissidents are forced to “show their cards” early in the process. Dissidents are denied the ability to “ambush” management by nominating directors for election at the meeting, with little or no prior notice to the company. These “ambush” tactics were successful at Patheon Inc.’s meeting in 2009, where dissident nominees were elected to the board. With advance notice provisions, issuers have the opportunity to investigate and critique the dissident nominees and the dissident shareholder, and to devise a strategy to combat the dissident, including replacing any of the management nominees if deemed necessary.
Advance notice provisions have long been common in the U.S., but have not, to date, been adopted by a significant number of Canadian issuers. However, two instances of advance notice provisions in the 2012 proxy season suggest that advance notice provisions will be more frequently employed going forward.
In Northern Minerals Investment Corp. v. Mundoro Capital Inc., the Supreme Court of British Columbia upheld the right of the board of Mundoro Capital Inc. to adopt an advance notice policy in the context of a proxy contest, holding that the governing legislation and the articles of the issuer gave the Board the power to exercise powers not specifically reserved to the shareholders. The court stated that the advance notice policy “ensures an orderly nomination process and that the shareholders are informed in advance of an AGM what is in issue” and “prevents a group of shareholders from taking advantage of a poorly attended shareholders meeting to impose their slate of directors on what could be a majority of shareholders unaware of such a possibility arising.”
The board of Maudore Minerals Ltd. (Maudore) also adopted an advance notice by-law in the context of a proxy contest, enabling Maudore to communicate to its shareholders its negative views about the concerned shareholders and proposed nominees, and to add three new independent directors to the management slate. Institutional Shareholder Services was supportive of the board’s adoption of the advance notice by-law, stating that “the adoption of an advance notice provision is not objectionable as this ensures that all shareholders including those voting by proxy will have adequate time to evaluate potential nominees to the board of directors.” In deciding competing injunction proceedings, on which Blakes was counsel to the concerned shareholders, the Ontario Superior Court held that “there was nothing unfair or inappropriate in introducing the Advance Notice By-law to ensure that all shareholders would have sufficient notice of a contested election of directors” (see Maudore Minerals Ltd. v. The Harbour Foundation).
“Ambushes” by dissenting shareholders are rarely successful even if an issuer does not have an advance notice provision, since management of the issuer will generally be notified of any unusual voting patterns by the transfer agent after the proxy cut-off deadline. Nonetheless, the courts’ acceptance of issuers’ adoption of advance notice provisions will likely increase their popularity in proxy contests. Issuers are advised to consider whether advance notice provisions should be adopted, while shareholders should be prepared for increasing incidences of such provisions being adopted in the course of a proxy contest.
The 2012 proxy season also highlighted difficulties in tabulating the proxies received.
Prior to the annual general meeting of Mosquito Consolidated Gold Mines Limited (Mosquito), management’s proxy solicitation firm used the TeleVote system to secure votes in favour of management’s nominees for the board. Under this system, management’s proxy solicitation firm telephoned shareholders and non-objecting beneficial owners and took their vote by verbal authorization to execute a proxy or voter instruction form. The dissident group objected to the use of this system, but the chair of the meeting deemed the votes received by TeleVote to be valid, with the result that management’s slate of directors was elected.
The British Columbia Supreme Court declared the meeting null and void, and ordered that a new meeting be held. The court’s ruling was based, in part, on the deficiencies of the TeleVote system which “fell short of providing a contemporaneous, reliable and verifiable record of proxies and voting instructions” (see International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited). The court held that, among other things, an oral grant of authority was inconsistent with the requirements of the applicable legislation; that shareholders voted without using a unique identifier as required for telephone or internet voting; that the proxy solicitation firm did not have a complete record of the oral grants of authority it received; that the proxy solicitation firm had a potential conflict of interest as agent for management and for shareholders; that the use of TeleVote was not properly disclosed to shareholders; and that there was a danger of abuse when partisan solicitation was combined with vote-taking. However, the court went on to state that TeleVote would be acceptable “with sufficient safeguards to ensure that proxies and voting instructions are properly given and shareholders have the freedom to vote as they choose”. The slate of directors nominated by the dissident group was ultimately elected.
At the annual meeting of Forbes & Manhattan Coal Corp. (Forbes Coal) – an issuer listed on both the TSX and the Johannesburg Stock Exchange (JSE) – a group of concerned shareholders, including shareholders based in South Africa, had nominated an alternate slate of directors. The chair of the meeting invalidated a proxy representing the votes of the South African shareholders who collectively held approximately 15% of the issued and outstanding shares in the capital of Forbes Coal. Pursuant to local practice in South Africa, an aggregate proxy was provided on behalf of the South African shareholders by PLC Nominees (Pty) Ltd., the nominee of the South African central securities depositary. The chair of the meeting invalidated the proxy on the basis that PLC Nominees (Pty) Ltd. was not listed on the shareholder register despite the fact that Forbes Coal had significant holders in South Africa and is listed on the JSE. Blakes represented the concerned shareholders in the subsequent court proceeding, which was resolved by the reconstitution of the Forbes Coal board.
To avoid post-meeting disagreements over the tabulation of proxies, issuers and shareholders should consider not only adopting a protocol for the conduct of the meeting, but also identifying potential issues – such as whether TeleVote is to be used, or whether the state of the shareholder register properly reflects the shareholdings – and determining in advance how those issues will be resolved.
Proxy battles have been on the rise in Canada. According to Georgeson Shareholder Communications Canada Inc., in 2003 there were just five proxy contests in which two opposing circulars were issued. That number rose to 14 in 2011 and to 25 so far in 2012. In this environment, issuers and shareholders alike are well-served to consider:
- whether advance notice provisions are in place, or are likely to be put in place, and
- whether any obstacles exist to the proper tabulation of votes at upcoming meetings.
In both cases, pre-emptive steps can be taken to manage these factors with a view to the proper and efficient conduct of annual or special meetings.