The Canadian Securities Administrators (CSA) has published for comment CSA Staff Notice 61-303 and Request for Comment Soliciting Dealer Arrangements (The Staff Notice). The Staff Notice outlines regulatory issues raised by soliciting dealer arrangements and seeks input on the practice. The 60-day comment period ends June 11, 2018.
Soliciting dealer arrangements may be used to solicit securities from securityholders to vote in connection with a matter requiring shareholder approval, or to tender securities for a takeover bid. These arrangements may also be used to incentivize dealers to contact securityholders to participate in a rights offering, to exercise rights to redeem or convert securities, or to attain the requisite quorum for amendments to documents affecting the rights of securityholders.
Generally, the fees for soliciting dealer arrangements are subject to a minimum or maximum. In a number of cases, the payment of any fee is contingent on “success” and/or only if a securityholder votes in a particular manner (e.g., only “for” or only “against” a transaction).
The CSA cites a number of recent instances of soliciting dealer arrangements in connection with contested director elections, with the most prominent examples being the 2013 proxy contest initiated by JANA Partners LLC for Agrium Inc. and the 2017 proxy contest initiated by PointNorth Capital Inc. for Liquor Stores N.S. Ltd. In each of those proxy contests, the CSA notes, the issuer made payments to soliciting dealers only for votes cast in favour of the election of its own incumbent nominee directors and the soliciting dealer fees would only be paid if the incumbent slate was elected.
The cause for the CSA’s concern arises out of the possibility that it may be difficult for issuers entering into soliciting dealer arrangements to communicate directly with retail investors who are objecting beneficial owners (OBOs) under National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting Issuer (NI 54-101). CSA staff are additionally concerned that although proxy solicitation firms retained by an issuer may be able to communicate with non-objecting beneficial owners and may have insights with respect to holdings by significant holders, they are not also able to contact retail OBOs.
The CSA notes that while there are rules in place such as National Instrument 54-102 Continuous Disclosure Obligation (NI 51-102) and the Investment Industry Regulatory Organization of Canada (IIROC)’s Rule 42 Conflicts of Interest, soliciting dealer arrangements still raise certain securities regulatory issues. From the perspective of the dealer, notes the CSA, soliciting dealer arrangements raise issues respecting appropriate management of conflicts of interest as well as risks associated with potential solicitations of proxies. From the perspective of the issuer, they raise public interest-related questions as to whether those arrangements affect the integrity of the tendering process or securityholder vote, including by potentially being used to entrench the board and management.
CSA Staff Notice 61-303 and Request for Comment Soliciting Dealer Arrangements is available for download from the websites of participating jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
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