Glass Lewis’ 2017 Canada Policy Guidelines

Towards the end of last year, Glass, Lewis & Co., LLC (Glass Lewis), a leading governance and proxy voting firm, released its 2017 Proxy Paper Guidelines for Canada (the Guidelines) for the upcoming 2017 proxy season.  Although the Guidelines contain changes compared to the guidelines released by Glass Lewis in 2016, most were foreshadowed in the 2016 guidelines so should come as no surprise.  The key changes are detailed below.

Director Overboarding

When making recommendations in relation to directors, Glass Lewis will generally recommend voting against (a) a director who is an executive of any public company and serves on more than two boards of public companies; and (b) any director who serves on more than five boards of public companies. If the above thresholds are exceeded, before making its recommendation, Glass Lewis will consider the potential director’s board duties (including committees) at the other companies, attendance records and involvement on boards of private companies, as well as the size and location of the companies where he/she serves.  For directors who are overboarded, Glass Lewis will not recommend against these directors serving at the company where they also serve as an executive. The rationale here is that executives will prioritize their attention to their executive duties over commitments to other, external public boards.

The same standard is relaxed with respect to TSX Venture Exchange companies and a case-by-case evaluation is applied to directors who serve for boards that are listed on both the TSX and TSX Venture Exchange.

Shareholder Rights Plans

Previously, Glass Lewis did not support plans that required take-over bids to remain open for greater than 90 days. However, in a direct response to the updated take-over bid rules established in Multilateral Instrument 62-104 and National Instrument 62-203, Glass Lewis will now support plans that require offers to be open for a maximum period of 105 days.

Say-On-Pay Proposals

Although advisory votes regarding executive compensation are not mandatory in Canada, where a company does conduct one, Glass Lewis may recommend voting against members of the compensation committee if no action is undertaken after the company fails to obtain majority approval on a say-on-pay proposal.

Equity Compensation Plans

When making a recommendation, Glass Lewis will not support full value award plans (such as restricted share plans, deferred share plans, share award plans or incentive compensation plans) that allow for a company to issue a fixed percentage of its outstanding shares above a rolling maximum of 5%.

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The author would like to thank Robert Corbeil, articling student, for his assistance in preparing this legal update.

Re Hemostemix Inc: Alberta Securities Commission upholds decision of TSXV in contested private placement

Following recent amendments to Canada’s takeover bid rules, private placements in the face of hostile bids have become newly controversial. Private placements in the context of proxy contests have received less attention. Yet this is somewhat surprising, because they are another facet of the same underlying question: whether regulators should allow a financing that may significantly affect the voting power of hostile shareholders in an ongoing shareholder persuasion campaign.

The Alberta Securities Commission (ASC) has just released its reasons for upholding the TSXV’s allowance of a private placement in the context of a proxy contest, without requiring shareholder approval. Re Hemostemix Inc.[1] carries important lessons for companies contemplating a private placement amidst shareholder agitation. It also re-affirms that the ASC will generally defer to judgments of the TSX and TSXV on this and other matters, absent compelling evidence they were unreasonable or contrary to the public interest.


Hemostemix Inc. (Hemostemix or the Company) is an early-stage company listed on the TSXV. In August of 2016, the Company announced a private placement (the Placement). The Placement included a $1 million debenture (the Debenture) issued to Wunderlich. In applying for TSXV approval, the Company stated that if Wunderlich converted his debenture and exercised the warrants issued under the Placement, he would hold 19.47% of the outstanding common shares. The Debenture was secured by a general security agreement (the GSA) and contained several negative covenants binding on the Company.

The TSXV accepted the Placement. Before doing so, the TSXV was in communication with counsel for both the Appellants and the Company, and received representations including an acknowledgement from Wunderlich that he was not acting “jointly or in concert” with the Company or management (the Acknowledgment). Among its reasons for approval were that the 20% threshold for “control person” was not met; the Company demonstrated a need for financing; the overall terms of the financing were not punitive within the context of the venture marketplace; and the fact that there would be no effect on the results of the shareholder meeting (the record date had elapsed). The Appellants appealed under s. 30 of Alberta’s Securities Act.

The ASC’s reasoning

The ASC declined to overturn the approval. In doing so, it first noted that as a matter of administrative law, a decision of the TSXV is reviewable on a standard of reasonableness, entitling it to significant deference. The Appellants cited three grounds from the case law for not deferring: that the TSXV erred in law; that the TSXV overlooked material evidence; and the TSXV failed to consider the perception of the public interest.

In considering whether the TSXV erred in law, the ASC looked at whether Wunderlich was a control person. Wunderlich’s holding did not exceed the 20% threshold in the TSXV definition. To the ASC, the TSXV adequately accounted for evidence that Wunderlich would not be acting “jointly and in concert” with Baker (a director) and Redekop (a former director and CEO), who between them owned approximately 26% of the shares, to bring his holding over 20% or otherwise “materially affect control of the issuer”.

They next considered whether the TSXV overlooked material evidence. First, they extensively reviewed the TSXV’s use of the Company’s Board minutes. The Appellants noted that Wunderlich was present at both of the meetings where the Placement was considered (one as an “Insider”, the other as a “Nominated Director”), and stated that he may have been acting in concert with others. Nonetheless, the TSXV had contended that “special access” was not a relevant consideration in determining who was a “control person” under their internal guidance on control persons (the Guidance), and that the Guidance was carefully thought through. The ASC accepted that the TSXV considered the minutes carefully with respect to Wunderlich’s relationships and was entitled to rely on the Acknowledgment.

Second, they looked at whether the TSXV overlooked material evidence that the Debenture gave Wunderlich “superior rights” within the meaning of the Guidance, thus potentially making him a “control person”. Here, they noted that even though the TSXV did not obtain a copy of the GSA, the TSXV was aware of it, Hemostemix’s filing with the TSXV contained a full summary of its terms and conditions, and those terms and conditions were not unusual in the circumstances.

The ASC next considered the public interest. The ASC distinguished this case from Hudbay and Mercury, two cases in which shareholder votes were required. In contrast to those cases, this case involved a “relatively modest financing”, which the TSXV considered in the context of Hemostemix’s difficult financial circumstances and market conditions. The Guidance was designed to promote the public interest in fair and efficient capital markets and facilitate an efficient administrative process. The ASC rejected the Appellants’ submission that the TSXV should have probed the representations made by Hemostemix’s counsel and in the Acknowledgement, referring again to the interest in fair and efficient markets. The ASC concluded that a shareholder vote could have delivered a pyrrhic victory for dissident shareholders and worthless shares for all holders.

Key takeaways

It is important to re-iterate that this case was a review of the TSXV’s decision rather than a fresh re-hearing of all of the evidence. It thus re-enforces that the ASC will generally defer to the judgment of the TSX and TSXV unless there are compelling reasons to depart from it.

That said, in considering complaints about private placements, securities regulators are clearly alive to market conditions and the need for a given financing. In this respect, the ASC’s reasons provide a faint echo of the Dolly Varden decision regarding private placements and hostile bids.[2] The ASC’s reasons appear especially sensitive to the implications of unwinding a financing that had already occurred, when there was clear evidence that the Board had carefully deliberated.

Nonetheless, the TSXV’s and ASC’s extensive reviews of the Company’s Board minutes suggest that where these kinds of financings are concerned, companies should be prepared to show that they fully and fairly considered various options. They should also prepare their board minutes in anticipation that they may end up before a regulator.

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The author would like to thank Joe Bricker, Articling Student, for his assistance in preparing this legal update.

[1] 2017 ABASC 14.

[2] 2016 BCSECCOM 359, 39 OSCB 8927.

Board Watch: More Complexity, More Committees

As a result of the increasing and ever-evolving responsibilities falling on the shoulders of boards of directors, the traditional three key committee model (covering audit and financial reporting, executive compensation, and director nominations and board succession planning) can be inadequate. The creation of additional committees has been one way to manage the burden.  According to EY in its recent Board Matters post entitled “Board committees evolve to address new challenges”, the prevalence of additional committees reflects “changing board priorities and pressures, boardroom needs and company circumstances.”

The statistics support this: more than 75% of S&P 500 companies have at least one additional board committee, up from 61% in 2013. A review of the S&P SmallCap 600 board committee structure reveals that 46% of smaller companies have at least one additional board committee.  A review of EY’s findings is summarized in more detail below.

Executive Committee Additions Lead the Way

S&P 500 companies most frequently (37% of the time) added an executive committee. Executive committees are generally permitted to exercise the authority of the board when the board is not in session, except in cases where action of the entire board is required by law. Following closely behind, 31% of the S&P 500 companies added a finance committee, 12% a compliance committee, and 11% a risk committee. In turn, the top five additional committees at smaller companies were executive (18%), risk (7%), finance (7%), strategy (6%) and compliance (5%).

Highest Growth: Compliance, Risk and Technology Committees

Between 2013 and 2016, compliance committees grew by 3%, risk and technology committees by 2% and M&A committees by 1%, while executive, finance, and public policy and regulatory affairs committees decreased by net 1%. For S&P SmallCap 600 companies, risk committees recorded the highest year-on-year growth at 3%.

Notably, while boards responded to some issues with the creation of new committees, others were assigned under the umbrella of existing committees. For example, of the 15% of companies that disclosed a committee focus on cyber, digital and information technology, over half assigned this responsibility to the audit committee.

Industry Matters

In six out of ten industries – telecom, utilities, financials, health care, industrials, and materials – over 75% of companies have added at least one additional committee. The unique compliance, risk and operational challenges of these sectors plays a part in this. Among the companies listed on the S&P SmallCap 600 index, utilities companies most frequently add additional committees (82%) followed by financial services in second place (68%).

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The author would like to thank Hugo Margoc, articling student, for his assistance in preparing this legal update.

Institutional investors managing US $17 trillion announce new corporate governance framework

In a move likely to have significant impacts on corporate governance, a group of institutional investors managing upwards of US $17 trillion has announced the formation of the Investor Stewardship Group (the Group). The Group has adopted a framework of certain non-binding investor-friendly principles, many of which are either common or already legally recognized in Canada, illustrating one of Canada’s greatest attractions as an investment destination: its strong protections of investor rights. On the other hand, the Group takes a skeptical view of a common practice in Canada: dual-class share structures.

The Group

The Group is a collective of some of the largest U.S.-based institutional investors and global asset managers, along with some international counterparts. The Group so far has 12 members, including Blackrock, Fidelity, T. Rowe Price, and RBC Global Asset Management. The Group hopes to “establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct.” It aims to do this through six “Stewardship Principles” for institutional investors and six “Corporate Governance Principles” for US-listed companies. The Group has announced that its framework will come into effect on January 1, 2018 in order to give companies time to adjust. While the framework is not intended to be “prescriptive or comprehensive”, or to remain static, it lays down clear principled expectations for US-listed companies and their institutional investors.

The Principles

Each principle contains rationales and a list of specific practices to be encouraged or discouraged. Some important examples include:

  • Majority voting: directors who do not receive a majority of votes cast with respect to their election should resign.
  • Annual election: directors should be elected annually.
  • Right to nominate directors: shareholders who own a “meaningful stake” in the company and have for a “sufficient period of time” should be able to nominate directors and have them featured on the management proxy
  • Dual-class shares: companies should adopt a one-share-one-vote standard. Companies with multiple classes of shares should re-evaluate their share structure on a regular basis or as company circumstances change, and establish mechanisms to end or phase out controlling structures at the appropriate time, while minimizing costs to shareholders.
  • Board composition: should be majority independent. The leadership should also be strong and independent. The Group states that some members prefer an independent chairperson, while others view a lead independent director as sufficient.

What it means for Canadian companies

The Corporate Governance Principles are intended to apply only to US-listed companies. Nonetheless, they indicate the views of investors who are likely to feature among the largest shareholders in many Canadian public companies.

Some of the specific policy proposals are already common or required in Canada. As we have detailed on this blog before, the TSX rules require a majority voting standard and annual elections, and recently proposed changes to the Canada Business Corporations Act will require these of all federally incorporated public companies.

Among the more notable aspects for Canadian issuers is the strong statement against dual-class share structures, which are unusually popular in Canada. As recently as 2005, 20% of TSX-listed issuers had multiple classes of shares, versus just 2% in the US. While they remain popular among investors and issuers, many Canadian institutional investors and commentators have come out strongly against dual class shares, generating an evergreen debate on the subject.

The actual impacts on the voting practices and portfolio composition of Group members remain to be seen. Nowhere has the Group stated that dual-class companies must abolish their dual-class structures. Rather, the framework suggests that dual-class companies should re-evaluate their share structure on a regular basis or as company circumstances change, in order to make clear to investors why a dual-class structure remains in that particular company’s best interests. In any event, though, Canadian public companies should recognize that a powerful and important voice has joined the line of skeptics of dual-class structures.

The author would like to thank Joe Bricker, articling student, for his assistance in preparing this post.

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M&A – key developments in 2016 and a look ahead

January 2017 – Walied Soliman and Orestes Pasparakis, co-chairs of Norton Rose Fulbright’s Special Situations Team hosted their annual video webinar on M&A activity in Canada. They highlight the key developments of 2016 and what to expect for 2017. Watch the video (registration required).


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An age of shareholder empowerment

In a corporate directors survey (the Survey) entitled “The swinging pendulum: Board governance in the age of shareholder empowerment”, PricewaterhouseCoopers LLP (PwC) presents current trends in investor influence and their impact on governance practices of boards and management teams.

Conducted amongst 884 company directors in the summer of 2016 with respondents representing over 24 industries, the Survey highlights the increasing influence of investors and board sentiment in this “new age of shareholder empowerment”.

Board composition

When recruiting new board members, investor recommendations appear to carry increasing weight. The Survey notes that there has been an increase from 11% in 2012 to 18% in 2016 in the use of investor recommendations as a consideration in the recruitment of new members. The Survey shows, however, that existing board members’ recommendations, search firms and management recommendations remain the predominant sources of information for identifying new directors.

Board diversity

While 96% of respondents recognize board diversity as “at least somewhat important”, 83% indicate that there are impediments to increasing board diversity. Of the impediments, respondents note that a limited pool of diverse director candidates is a significant factor. Regardless of the perceived obstacles, a majority of directors believe that diversity positively impacts board effectiveness and company performance.

PwC states that a major obstacle to establishing more diverse boards is that boards are looking for current or former chief executive officers as potential new directors and, as an example, only 4% of S&P 500 CEOs are female and only 1% of Fortune 500 CEOs are African-American.

With respect to gender balance, 20% of S&P 500 board members are female and 31% of new board members in 2015 were women. The Survey cites research that shows that Fortune 500 companies with higher representations of female board members “attained significantly higher financial performance, on average, than those with the lowest representation of female directors”.

Director communications and shareholder activism

According to the Survey, direct communications between board members and investors has grown in prevalence in the past several years. While more than 50% of respondents note that they have engaged in direct communications, the Survey reports that directors are still unsure as to whether these lines of communication significantly impact shareholder behaviour. Only a small number of respondents supported the notion that direct engagement impacts investing decisions and proxy voting.

Regardless of the scale of impact, PwC recommends ongoing engagement with shareholders as a best practice. Large shareholders should be the focus of communications and topics such as capital allocation, executive compensation and strategy are important areas to broach. One of the reasons for proactively engaging with shareholders is to “[get] ahead of activism”. 79% of directors state that their board took some action related to shareholder activism in the previous 12 months.


Responses to Survey questions related to strategic time horizons suggest that boards are responding to investor pressures to reduce emphasis on short-termism and instead focus on building a framework for long-term shareholder value creation. The Survey also notes that investors have increasing influence over how a company uses its resources. For example, nearly half of the director respondents state that their company increased share buybacks as a result of investor demands.

In an age of broadening shareholder empowerment, boards and management teams would be prudent to proactively engage with shareholders and develop lines of communication with respect to hot topics such as long-term strategy, use of resources and board composition.

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The author would like to thank Vincent Belley, articling student, for his assistance in preparing this legal update.

Corporate Governance, in Silicon Valley and Beyond

The best practices and processes through which companies manage their corporate affairs have long been analyzed and discussed under the “corporate governance” umbrella.  Corporate governance practices and trends among large public companies are often presented as a benchmark for all companies.  Less often discussed are the industry-specific practices tailored by companies to fit their businesses.

One Silicon Valley law firm, Fenwick & West LLP (Fenwick), has taken a closer look at these differences.  Fenwick collects and compares data on the corporate governance practices of large publicly traded companies and technology and life science companies via an annual survey.  In an article entitled Corporate Governance: A Comparison of Large Public Companies and Silicon Valley Companies[1], Fenwick compares the governance practices of companies included in the Standard & Poor’s 100 Index (S&P 100) against those of the technology and life sciences companies included in the Silicon Valley 150 Index (SV 150).

Fenwick identifies a number of significant findings, summarized as follows:

  • Dual-Class Voting Stock Structure: While dual-class voting stock structure has historically been more prevalent among S&P 100 companies, it has been gaining popularity among SV 150 companies in recent years and is now practiced by 11.3% of SV 150 companies, compared to 9.0% of S&P 100 companies.
  • Classified Boards: Classified boards (where the term length of each director is dependent upon his or her classification) are significantly more common among SV 150 companies, accounting for about half of all companies. In contrast, the use of classified boards among S&P 100 companies is on a steady decline, accounting for only 4% of companies in 2016.
  • Majority Voting: The implementation of some form of majority voting has been consistently increasing among companies in both cohorts, now accounting for 95% of S&P 100 companies and 55% of SV 150 companies. The increase is especially dramatic among S&P 100 companies: rates rose in those companies from just 10% in the 2004 proxy season to 95% in 2016.
  • Stock Ownership Guidelines: The prevalence of stock ownership guidelines is increasing among both cohorts, with the SV 150 recently surpassing the S&P 100 in terms of frequency.
  • Stockholder Proposals: Stockholder activism is significantly lower among SV 150 companies, although a downward trend has been observed among both grounds.  2016 saw no contested director elections among either group.
  • Executive Officers: While the number of executive officers is trending downward among both groups, the number is significantly lower among SV 150 companies.
  • Leadership: Combined Chair/CEO positions continue to be significantly more common among S&P 100 companies at a rate of 69%, compared to approximately one third for SV 150 companies.
  • Board Meeting Frequency: Companies in the SV 150 tend to hold more board meetings than their S&P 100 counterparts, despite an overall downward trend among both groups.
  • Board Size and Composition: The overall number of directors is substantially lower among SV 150 companies and while the prevalence of insider directors is decreasing among both groups, the role continues to be more common among SV 150 companies.
  • Board Diversity: The presence of female directors continues to increase. The rate of increase is higher among SV 150 companies. Of note, SV 150 companies report increasing numbers of female directors and declining numbers of boards without female members.  Among the SV 150, 74% of companies now have at least one female director.

A full copy of Fenwick’s 2016 report can be obtained here.

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The author would like to thank Erika Anschuetz, articling student, for her assistance in preparing this legal update.

[1] David A. Bell, Fenwick & West LLP, “Corporate Governance: A Comparison of Large Public Companies and Silicon Valley Companies” (2016) Harvard Law School Forum on Corporate Governance and Financial Regulation.

Universal proxies: SEC proposal moving forward

In a move that may encourage shareholder activism and increase the potential for proxy contests, the Securities and Exchange Commission (SEC) has voted to propose amendments to the U.S. federal proxy rules (the Proposed Rules). As discussed in a previous post, the Proposed Rules will require parties in all “non-exempt” solicitations in a contested director election to use universal proxy cards that include the name of all board of director nominees (i.e., both dissident and management nominees). As such, shareholders voting by proxy would be able to vote for a combination of management and dissident candidates.  Currently, only those shareholders voting in person have the ability to do so.

In addition to prescribing content and deadlines for filing proxy statements and universal proxy cards for both management and dissidents, the Proposed Rules also include the following proposed amendments:

  • Notice to management: dissidents would be required to provide management with notice of its intent to solicit as well as the names of its nominees by a specified date. Shortly after, management would then be required to provide the dissident with its list of nominees;
  • Reference to both proxy statements: in each of their respective proxy materials, each party would be required to refer shareholders to the other party’s proxy statement for information about that party’s nominees and explain how to access it; and
  • Solicitation: dissidents would be required to solicit shareholders representing at least a majority of the shares entitled to vote on the election of directors.

Overall, these amendments will reduce the barriers dissidents face when engaging in a proxy contest and may increase their likelihood of achieving representation on a board of directors.

Currently, shareholders voting by proxy are required to choose from either management’s nominees or the dissident’s nominees by submitting either party’s respective proxy card, each listing that respective parties’ nominees only.  Using the proposed universal proxy card, shareholders voting by proxy will see all nominees on one card (i.e., the board and dissident’s nominees) and will have the ability to select a combination of directors to elect. This change may increase the dissident’s nominees’ exposure to all shareholders, eliminate management nominees’ ability to “hide in the collective” and may, upon an initial glance, imply that management may be supportive of the dissident’s nominees.

The SEC is now seeking public comment on the Proposed Rules for 60 days following which they will vote on it a second time.  For a summary of the Commission’s reasons for and against the Proposed Rules, see Commissioner Michael S. Piwowar (against), Commissioner Kara M. Stein (for) and Chair Mary Jo White’s (for) published statements.  For a summary of all amendments as well as the full text and commentary, refer to the SEC’s press release and the proposal, respectively.

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Tactical defenses by targets: OSC and BCSC defer to target board decision to implement private placement in face of hostile bid

Further to our post on the Dolly Varden Silver Corp. (Dolly Varden) and Hecla Mining Co. (Hecla) decision, the Ontario and British Columbia Securities Commissions (the Commissions) recently released their reasons for their decision in July, 2016 (the Reasons) allowing Dolly Varden to proceed with a proposed private placement announced shortly after Hecla launched a hostile bid for Dolly Varden.  Following the decision, Hecla promptly withdrew its bid.

The Dolly Varden bid has been closely watched because it is the first decision to consider the use of a private placement by a target since the introduction of Canada’s new take-over bid regime in May, 2016

National Policy 62-202 –Take-over Bids – Defensive Tactics (NP 62-202) states that a securities issuance, i.e. a private placement, could, in certain circumstances constitute a defensive tactic attracting regulatory scrutiny on the basis that it may frustrate the ability of shareholders to respond to a bid or a competing bid. The Reasons note that prior to the introduction of the new bid regime, regulatory scrutiny in the context of defensive tactics was focused on shareholder rights plans. The new focus on private placements is a more difficult balance to strike, as unlike shareholder rights plans whose purpose is to thwart an unwanted bid, private placements may serve a variety of corporate objectives, not related to the bid. The Reasons provide that when considering whether a private placement is purely a defensive tactic, the extent to which the private placement serves a bona fide corporate objective must be balanced against the takeover bid principle of ensuring shareholder choice to tender to a bid and promoting a transparent and even-handed bid process.

The Reasons emphasize that regulators must consider the responsibilities of boards of directors in implementing corporate actions, including considering the directors’ standard of care and the business judgment of boards. The Commissions cited with approval the British Columbia Securities’ Commission’s decision in Re Red Eagle, 2015 BCSECCOM 401, that “securities regulators should tread warily in this area and that a private placement should only be blocked by securities regulators where there is a clear abuse of the target shareholders and/or the capital markets”.

Considering the business judgment rule, the Reasons layout the test to determine whether a private placement is a defensive tactic. First, if the evidence clearly establishes that the private placement is not in fact a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process. In considering this, the Commissions set forth the following non-exhaustive list of considerations: (a) whether the target has a serious and immediate need for financing; (b) whether there is evidence of a bona fide, non-defensive, business strategy adopted by the target; and (c) whether the private placement has been planned or modified in response to, or in anticipation of, a bid.

If, after this analysis, it cannot be clearly established that the private placement is not a defensive tactic, then the principles set out in NP 62-202 are engaged. In addition to the foregoing list of considerations, the regulators will also consider the following additional non-exhaustive questions: (a) would the private placement otherwise be to the benefit of shareholders by, for example, allowing the target to continue its operations through the term of the bid or in allowing the board to engage in an auction process without unduly impairing the bid?; (b) to what extent does the private placement alter the pre-existing bid dynamics, for example by depriving shareholders of the ability to tender to the bid?; (c) are the investors in the private placement related parties to the target or is there other evidence that some or all of them will act in such a way as to enable the target’s board to “just say no” to the bid or a competing bid?; (d) is there any information available that indicates the views of the target shareholders with respect to the takeover bid and/or the private placement?; and (e) where a bid is underway as the private placement is being implemented, did the target’s board appropriately consider the interplay between the private placement and the bid, including the effect of the resulting dilution on the bid and the need for financing? Regulators will also need to consider whether there are any public interest considerations that are relevant to the case.

The Commissions, in applying the first portion of the test, found that the Dolly Varden private placement was instituted for non-defensive purposes. Dolly Varden successfully established that: (a) they were contemplating an equity financing prior to the announcement of the Hecla bid; (b) the size of the private placement was not inappropriate in light of their liabilities and what would be required to carry out their exploration work at their silver property; and (c) they considered a larger financing and decided not to pursue that opportunity. Ultimately, the Commissions found that Dolly Varden was pursuing a bona fide corporate objective of seeking capital to repay indebtedness and to pursue its exploration program. Therefore, they did not need to go to the second step of the analysis.

The Reasons reinforce the deference to the business judgment of the target board. Where there is evidence of bona fide corporate reasons for a private placement, regulators will be hesitant to interfere.  It also appears that the timing of the board’s consideration of the private placement was a significant factor in the Reasons. Issuers should note that where evidence cannot be shown that the target board was considering a financing opportunity prior to an announcement of bid, or where there is evidence of mixed motivations, the target may have a tougher time establishing the requisite bona fide corporate objectives.

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Placeholder board nominees: A new tactic in the activist tool-kit?

In response to the threat of a shareholder ambush of director nominations at a shareholder meeting, many Canadian companies have adopted advance notice provisions (ANPs). ANPs require that shareholders inform a company by a certain deadline if they wish to nominate directors to the board. For annual shareholder meetings, this deadline is typically no less than 30 days in advance of the meeting. For special meetings, it is typically no less than 15 days after the announcement of the meeting. Norton Rose Fulbright’s Special Situations team has been at the forefront of this development, having been involved in many of the leading cases in Canada with respect to ANPs.[1]

Nonetheless, the recent US campaign involving hedge fund Corvex Management LP (Corvex) and The Williams Companies, Inc. (Williams), where Corvex attempted to elect “placeholder” nominees to circumvent an advance notice deadline, shows that activists may seek ways around ANPs, and that issuers must remain vigilant.

Corvex’s attempt to use placeholder nominees comes in the context of Corvex’s long involvement as an investor in Williams, with Corvex first announcing a position in late 2013. As the deadline for the Williams advance notice by-law approached for the 2016 annual general meeting, Corvex announced by way of press release that it would be nominating a slate of ten directors, including the managing partner of the firm, to replace the entire board. In the run-up to the annual meeting, it would then identify new, independent directors whom it would envision as serving as long-term directors of Corvex, and provide full information on those nominees and their qualifications in Corvex’s proxy statement. All of the placeholder directors were to be employees of Corvex. If elected, the placeholder directors would immediately appoint the directors Corvex had identified and resign. Notably, its press release stated that Corvex sought to allow shareholders to choose directors without the “constraint of a board-imposed nomination window,” essentially admitting that Corvex sought to circumvent the advance notice by-law.

Williams subsequently announced plans to overhaul its board. As a result, Corvex’s tactics remain untested.

It remains to be seen if such a tactic could be effective in Canada, given the nature of the ANP, which is to provide issuers and shareholders sufficient time and information to make an informed choice about which directors to elect. In any case, as Wall Street Journal online commentary suggests, this tactic may have limited applicability, in part because activists typically seek to replace a minority of the board with carefully chosen nominees.

Regardless of any ultimate success of this tactic, companies should maintain close contact with their shareholder base and review their defensive policies carefully.

[1] In Orange Capital, LLC v. Partners Real Estate Investment Trust, 2014 ONSC 3793, our Special Situations team successfully represented Orange Capital in the litigation. This case clarified the criteria courts will apply in interpreting advance notice by-laws. In Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090, our Special Situations team was counsel to the company in the proxy battle that established the advance notice policy in Canada.

The author would like to thank Joe Bricker, articling student, for his assistance in preparing this legal update.