No Ordinary Shareholder Meeting: Shareholder Proposals, Requisitions, Proxy Contests and Stealth Proxy Campaigns

Transcription

1 No Ordinary Shareholder Meeting: Shareholder Proposals, Requisitions, Proxy Contests and Stealth Proxy Campaigns By Peter M. Roth and Trevor R. Scott Farris, Vaughan, Wills & Murphy LLP In the normal course of a Canadian public company s affairs, the calling and holding of a shareholder meeting and the related solicitation of proxies is a straightforward process, usually run on a recurring annual timetable with limited support from legal counsel. However, once a dissident shareholder seeks to put new business before a company s shareholders and solicit proxies in an attempt to influence the voting at a shareholders meeting, it becomes apparent that the calling and holding of a shareholder meeting is complex and multifaceted, affording various strategic opportunities for both the target company and the dissident shareholder. This article explores four mechanisms 1 shareholder proposals, shareholder requisitioned meetings, full proxy contests and stealth proxy contests which a dissident group can use to force business to be put before a target company s shareholders. Before exploring these mechanisms, a brief overview of the process of calling and holding a shareholder meeting is discussed. Overview of Shareholder Meeting Process The process and timing for calling and holding shareholder meetings, and related disclosure rules may provide key strategic and legal advantages when a public company is facing a dissident shareholder. Corporate statutes and company articles or bylaws generally require that notice of a meeting be provided at least 21 days but not more than two months prior to the date of the shareholder meeting. Additionally, public companies are subject to continuous disclosure regulations, which are generally set out in National Instrument Continuous Disclosure Obligations (NI ), as well as regulations relating to communications with beneficial shareholders, which are set out in National Instrument Communication with Beneficial Holders (NI ). In the normal course, a vanilla shareholder meeting (i.e., uncontested with no extraordinary stock exchange approvals) that follow the unabridged time periods set out in NI take approximately 60 days from the date that depositories and regulatory bodies are first advised of the meeting. Within this period, the public company has ample time to provide various notifications of the meeting, prepare the meeting materials, seek and obtain any required review or approvals from stock exchanges, obtain corporate approvals, print materials, and arrange for the mailing of meeting materials to registered and beneficial shareholders of the company at least 21 days before the date of the meeting. With the assistance of experienced counsel, a management supported shareholder meeting can be held in approximately 35 days (excluding any extraordinary stock exchange approvals). 2 Mathematically, the prescribed time periods (taking advantage of abridgement provisions) in NI add up to as little as 29 days from the date of the first notification to the date of the meeting. However, practically, a public company will generally need to be prepared and organized in advance in order to take advantage of the full abridgement provisions. The ability to take advantage of legal abridgement provisions and operate outside of the normal time constraints in which a meeting can be called

2 G U I D E T O T H E L E A D I N G 500 L A W Y E R S I N C A N A D A and held may, in addition to allowing management to control the process, present tactical advantages. A key timing consideration for the public company is the selection of the record date. A record date must be chosen in order to determine the point at which persons holding shares of a company (which is in constant flux for a publicly traded company) will be entitled to receive notice of and vote at a meeting. Pursuant to the abridgement provisions of NI , a record date can be selected at a date earlier than the normal minimum 30 days prior to the meeting date but in any event not less than the number of days required under corporate laws, which is generally 21. It may also be advantageous to select a later date to prevent recent shareholders from voting, and corporate law and NI set two months or 60 days as the outside date at which a record date may be set. The ability to select the exact date at which shareholders are entitled to receive notice of and vote at a meeting may therefore present a tactical advantage to the public company. For a dissident, a key timing consideration is the request and receipt of lists of the registered and non-objecting beneficial shareholders (NOBOs) of the subject company, with the key list being the non-objecting beneficial owner, or NOBO list. Corporate legislation requires the delivery of notices and materials to the company s registered shareholders as historically, shares were held and transferred in a direct holding system, whereby owners of the company s shares would be registered in the company s share register (i.e., the shareholders would be registered shareholders), and the registered shareholders would hold a physical certificate with their names on it, evidencing ownership over such shares. As a result of the move to a bookbased entry (or indirect holding) system, a shareholder s ownership of securities is recorded on the books of intermediaries (for example, brokers) on behalf of the ultimate beneficial shareholder. The book-based system allows the vast majority of securities transactions of a public company to be settled by computerized book entries in the records of intermediaries, which facilitates a modern and efficient means of registering trades in shares. Most shares of public companies are now held indirectly by intermediaries on behalf of the ultimate beneficial shareholders. As a result, NI was implemented in order to facilitate communication between public companies and beneficial shareholders and allow beneficial shareholders to exercise their voting rights as if they were registered shareholders. Beneficial shareholders are divided into two categories: NOBOs and objecting beneficial owners of shares (OBOs). An OBO is a beneficial securityholder that has provided instructions to an intermediary holding securities in an account on behalf of the beneficial owner that the beneficial owner objects, for that account, to the intermediary disclosing ownership information about the beneficial owner while a NOBO consents to the intermediary disclosing ownership about the beneficial owner. Any person or company can request the most recently prepared NOBO list from a public company or depository. The request must be accompanied by payment of a fee to prepare the list and an undertaking to use the NOBO list for certain acceptable purposes, including: for the purpose of sending securityholder materials to NOBOs in accordance with securities laws; in an effort to influence the voting of securityholders of the company; in an effort to acquire securities of the company; or any other matter relating to the affairs of the company. Upon receipt of a valid request for a NOBO list, the public company must send the NOBO list within 10 days of receipt of the request. Given the 10 day delay under NI that a public company may (and likely will in hostile circumstances) take advantage of, dissidents that contemplate mailing materials to the shareholders of a public company commonly request a NOBO list at the earliest opportunity. Corporate law, for its part, also allows any person to apply to a company, or the company s transfer agent, for a list of the company s registered shareholders. In a similar process as with a request for a NOBO list, a company must provide a list of its registered shareholders in response to a valid request. As a result, for the public company, a request for a shareholder list or NOBO list may be the first warning that dissident shareholder action is forthcoming. In sum, there are a number of strategic opportunities that can be taken advantage of during the process of calling and holding a shareholder meeting. This article now explores four methods which dissidents can put forward their business at a shareholder meeting. Shareholder Proposals A shareholder proposal is a written notice of not more than 1,000 words in length setting out a matter that the submitter wishes to have considered and voted on at the next annual general meeting of a company. A shareholder proposal must be signed by a registered or beneficial owner of shares that carry the right to vote at annual general meetings, and the shareholder must have been a registered or beneficial shareholder for an uninterrupted period of at least two years prior to the date of signing the proposal. Additionally, a shareholder proposal is subject to a number of other requirements, including a requirement that the proposal be signed by shareholders (or a single shareholder) holding at least one per cent of the issued and outstanding shares

3 of the company or shares having a fair market value in excess of C$2,000. A shareholder proposal must be received at the registered office of the company at least three months before the anniversary date of the company s previous annual meeting (and notice of this deadline is typically published in a public company s management information circular prepared for annual general meetings). Upon receipt of a valid proposal, the company must send the text of the proposal, as well as information on the submitter and supporters of the proposal, to all persons who are entitled to notice of the annual meeting. In practice, a company will include a valid proposal and other required information in the company s information circular, along with a recommendation (and a solicitation for proxies) to vote against the shareholder proposal. There are a number of grounds upon which a company may refuse to send the proposal to its shareholders, including: non compliance with form requirements; the company has already called an annual meeting prior to receiving the proposal; substantially the same proposal was submitted to the shareholders of the company within a prescribed period before the receipt of the proposal, and the previous proposal did not garner prescribed support; the proposal clearly does not relate in a significant way to the business or affairs of the company; the primary purpose of the proposal is clearly publicity or enforcing a personal claim; the proposal has already been substantially implemented; the proposal, if implemented, would cause the company to commit an offense; and the proposal deals with matters beyond the company s power to implement. Due to the fact that a shareholder proposal may only be used to present dissident business at a company s annual meeting, the shareholder proposal mechanisms are less attractive as a means of removing existing directors and replacing them with a dissident slate, unless the dissident s agenda times perfectly with the company s schedule for holding an annual meeting. Typically, shareholder proposals are used to compel a target company to adopt a course of action without a change in directors or management. One example of a successful and high profile use of shareholder proposals is the recent adoption of say on pay, or advisory votes on compensation, by at least 21 Canadian companies in response to a bombardment of shareholder proposals in 2009 and Nonetheless, once a dissident s business has been put on a company s business to be transacted at an annual meeting, regardless of whether such business concerns the election or removal of directors, the company and the dissident shareholder are engaged in a campaign to solicit proxies with respect to such business. Requisitioning a Meeting A meeting can be requisitioned by a shareholder, or a group of shareholders, holding at least five per cent of the voting shares of the company, as determined on the date that the requisition is received by the company. A requisition must state, in 1,000 words or less, the business to be transacted at the meeting, and must be signed by all requisitioning shareholders. Upon receiving a compliant requisition, the directors of the company must, regardless of the company s articles, call a general meeting of the shareholders to be held not more than four months after the date the requisition is received by the company. The company must then send notice of the date, time and location of the requisitioned meeting within prescribed time periods to each shareholder entitled to attend the meeting, and to each director of the company. Additionally, the company must send the text of the requisition, which may be included in the notice of meeting, but is typically included in management s information circular prepared for the requisitioned meeting. There are a number of grounds upon which a company may refuse to call and hold a requisitioned meeting, which are generally analogous to the reasons set out above for rejecting a shareholder proposal. Due to the ability of dissidents to requisition a meeting at any time, a requisitioned meeting is a preferred mechanism to remove and replace a board of directors as opposed to the shareholder proposal process. Nonetheless, a key consideration in such an instance is not the five per cent required in order to validly requisition a meeting, but the percentage of shareholders required in fact in order to win the day at the requisitioned meeting, which is normally far in excess of the five per cent threshold required to compel a requisitioned meeting. Of interest as well is the Ontario Securities Commission (OSC) recent view on the attempt to tactically use shareholder requisition provisions to allow the shareholders of Hudbay Minerals Inc. (which did not have the right to vote on proposed merger with Lundin Mining Corporation) to effectively vote on such transaction by the removal of the board of Hudbay through a shareholder requisitioned meeting. The OSC concluded that: If shareholders wish to challenge a transaction by exercising their fundamental right to elect or remove directors in accordance with their legal rights to do so under corporate law, the board of directors should not be permitted to actively frustrate that objective [by completing the merger with Lundin].

4 G U I D E T O T H E L E A D I N G 500 L A W Y E R S I N C A N A D A Proxy Contests The management of a public company is required to solicit proxies from registered securityholders at the time notice is given for a shareholder meeting. Additionally, management is required to send an information circular, prepared in accordance with a prescribed form, along with the notice of meeting to each registered securityholder whose proxy is being solicited. The above mentioned proxy related materials are also required to be sent to beneficial holders of securities of the public company, all within the timeframes specified in applicable constating documents, corporate statues and securities regulation (see above discussion on timing for the calling and holding of a meeting). Dissident shareholders (i.e., not management of a public company) wishing to challenge management business at a shareholder meeting in a full blown proxy context are also subject to proxy solicitation rules. A dissident shareholder that solicits proxies from registered securityholders of a public company must, concurrently with or before such solicitation, send a dissident information circular in the prescribed form to each registered securityholder whose proxy is solicited. Dissidents will also typically seek to disseminate the above mentioned dissident circular and proxy to as many of the target company s securityholders a possible, and thus, as discussed above, the dissident may request the company s most recently prepared NOBO list in order to mail its materials to the company s NOBOs. Stealth Proxy Contests Dissident shareholders who solicit proxies from not more than 15 securityholders are not required to prepare a dissident information circular. Dissident shareholders are only required to file (not mail) a document on SEDAR at the time of the solicitation containing applicable information, and only if the dissident solicitation relates to a significant acquisition or restructuring transaction or the nomination of any individual for election as a director. The ability to solicit proxies without having to mail a dissident information circular (which mailing would be subject to the timelines set out in NI , as well as necessitate a request for a shareholders list) effectively allows dissidents, who solicit from not more than 15 securityholders, to run stealth proxy campaigns. Target management may not become aware of a stealth campaign until proxies (which are subject to the form of proxy requirements under NI ) are filed at cut-off time, typically 48 hours in advance of the meeting, which may be too late for management to react. Management s exposure to stealth proxy campaigns may even be further compounded due to no-vote or withhold-vote campaigns launched by institutional advisory firms, which have become common in recent years in instances where the target company is off-side with the institutional advisory firm s acceptable corporate governance or executive compensation practices. Finally, a public company may be caught entirely by surprise by another stealth tactic: nominations and voting from the floor of the meeting itself. Registered shareholders have the right to be present at shareholder meetings without any advance notice of intention to be present. Registered shareholders may also nominate dissident directors from the floor of the meeting for election to the board, and vote from the floor of the meeting on any business, all without any advance notice. It is not uncommon for only 20 to 30 per cent of all shareholders to vote at a shareholder meeting. Thus, a single dissident shareholder holding 10 to 15 per cent of the shares of a company may have sufficient shares to successfully pursue its agenda. A dissident registered shareholder can take a public company entirely by surprise on the day of the meeting itself, leaving the public company unprepared and with very limited defensive options. Preparing for a Proxy Contest Where public companies and dissident shareholders have diametrically opposed points of view, there is often little that can be done, given the mechanisms available to dissidents under Canadian law, to prevent dissident business and proxy solicitations from occurring. However, there are a number of measures that can be taken in order to prepare for such contests, and possibly avoid a costly and public proxy campaign. First, there is really no substitute for good governance, good corporate disclosure and a genuine and proactive shareholder communications program, and taking such measures provide the right environment to ensure ongoing shareholder support for management and the incumbent board. At the very least, the company will be aware of and in contact with its major shareholders, which will ideally give rise to opportunities to resolve issues without having to resort to a proxy contest or be taken by surprise by unexpected stealth campaigns. Secondly, public companies should monitor their shareholdings, SEDAR filings, requests for shareholder lists, daily proxy tabulations up to the cut off date prior to a meeting, requests to register shares directly in the name of a shareholder, and any other early warning indicator that dissident shareholder action is forthcoming. Third, if dissent shareholder action is known or suspected at an upcoming meeting, public companies should consider ensuring that the meeting is run by an experienced meeting chair (possibly advised by independent counsel). Finally, as alluded to above, the seemingly straight forward process of putting business before shareholders and calling and holding a meeting can give rise to a myriad of strategic variables when

5 hostility is introduced into the equation, and companies are not typically accustomed to dealing with these situations on a regular basis. In these circumstances, public companies should turn to their outside counsel for advice, as well as consider engaging professional proxy solicitation firms and communications specialists. 1. For illustrative purposes, the sections describing the mechanics and requirements of shareholder proposals and requisitions in this article are based on the provisions of the British Columbia Business Corporations Act. 2. Add another seven days to companies that are subject to requirements to publish advanced newspaper notification of record date. Peter M. Roth, Farris Vaughan, Wills & Murphy LLP Tel: (604) Fax: (604) proth@farris.com Peter Roth acts as a corporate counsel to a number of public and private companies in diverse industries, providing day to day advice on a broad range of corporate matters and ongoing securities law obligations. Peter has an extensive transactional practice, having advised on numerous domestic and cross border acquisitions and divestitures, debt and equity financings, proxy contests, supported and unsupported take-over bids, plans of arrangement, restructurings, share exchanges and commercial transactions. Peter is the Chair of the Securities Law Subsection of the Canadian Bar Association (BC), and lectures and regularly authors articles on corporate, finance and securities matters. Trevor R. Scott, Farris, Vaughan, Wills & Murphy LLP Tel: (604) Fax: (604) tscott@farris.com T revor Scott has extensive experience advising senior public and private companies, national investment dealers and boards of directors on debt and equity financings, mergers & acquisitions, commercial transactions, take-over bids, proxy contests and corporate governance. Trevor is a member of the Securities Law Advisory Committee, which is a committee of leading lawyers that provides advice to the British Columbia Securities Commission on legal and policy issues relating to public company regulation. He is also an Executive of the Canadian Bar Association s National Business Law Section. Trevor is a past Chair of the Securities Law Subsection of the Canadian Bar Association (BC). The Canadian Legal Lexpert Directory names him among the leading Corporate Commercial lawyers in British Columbia. Trevor is also named by Best Lawyers for corporate law (finance and mergers & acquisitions). In 2008, he was recognized by Lexpert as being one of Canada s leading lawyers under 40. Trevor has received a high to very high legal ability rating from Martindale-Hubbell. Trevor is also involved in various professional organizations, including membership in the Vancouver, Canadian and International Bar Associations. Trevor regularly lectures and authors articles on mergers & acquisitions, corporate finance and other corporate matters.