Soliciting proxies is at the heart of any shareholder activist campaign or issuer defence. However, while defined very broadly, authoritative guidance regarding what constitutes a proxy “solicitation” remains relatively thin. As proxy season begins, we review the meaning and implications of this key legal concept for the benefit of both shareholders and issuers.
Our key practical takeaways include:
- What constitutes a “solicitation” of proxies is approached “inclusively”, and the nature, context and purpose of the communication is key.
- While an individual communication may not amount to a solicitation, multiple communications considered together may cross the line.
- An issuer’s public response to an activist campaign will generally be viewed in that context and thus be afforded some latitude to defend both the issuer and its directors before crossing the solicitation threshold.
- The standard of proof is the balance of probabilities. Circumstantial evidence is admissible, but mere suspicion or plausibility is insufficient. Courts have also been reluctant to infer a solicitation has occurred in the absence of clear support.
For a concise and comprehensive overview of key activist tactics and target defensive strategies, see our Shareholder Activism in Canada: The Legal Framework guide. For more Fasken corporate governance and M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre.
Proxy Solicitation and Exemptions
The Canada Business Corporations Act (CBCA) defines “solicitation” very broadly and to include a “communication to a shareholder under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy[1]". Securities law provides a substantively identical definition[2]. Unless an exemption is available, the solicitation of proxies by an activist is prohibited without the circulation of a dissident proxy circular and form of proxy to each other shareholder whose proxy is being solicited.
Two exemptions are available to an activist (but not an issuer) under the CBCA and securities law[3], and these can be used alone or in combination. The “quiet solicitation” exemption permits the solicitation of proxies from up to 15 shareholders. The “public broadcast” exemption permits a solicitation of proxies by press release, advertisement or other notice generally available to the public[4]. Where a dissident’s actions might test the bounds of these exemptions, appreciating what could constitute a “solicitation” becomes critical for both the activist and target company.
Solicitation Caselaw: Guidance From the Courts
What qualifies as the “solicitation” of a proxy has come before several Canadian courts. Nonetheless, the concept’s borders remain only roughly defined. Somewhat conflicting instructions have been issued. The applicable fact scenarios have also varied widely.
General Principles
It has been confirmed that the definition of “solicitation” under the CBCA is to be interpreted “broadly and in an inclusive manner[5]…” The court has also determined that whether a solicitation has occurred is “a question of fact depending on the nature of the communication and the circumstances of its transmission[6]…”
Communications by Shareholders
In one case, even though the activist’s letter to shareholders expressly stated it was not requesting proxies at that time, the letter was held to be a solicitation for also including a request not to execute the form of proxy circulated by company management[7]. In another case, a shareholder post on a public forum was held to be a solicitation for urging shareholders to vote “withhold” or “against” the slate of directors put forward by management[8].
An Ontario court indicated in obiter that it was “inclined” to view “communications among shareholders directed toward reaching a consensus on the voting of their respective shares” at a shareholder meeting as a solicitation, even if a proxy was not formally sought during such conversations[9]. However, the court did not need to definitively decide the issue as, even had there been a solicitation, it would have involved less than 15 shareholders (i.e., it would have qualified for the “quiet solicitation” exemption).
Seven years later, an Alberta court stressed the obiter nature of the Ontario court’s comments when a target company sought to rely on the earlier judgement[10]. Rather ambiguously, the court also indicated, without providing any further detail, that a different approach to interpreting the definition of “solicitation” under securities law as compared to under corporate statute may be warranted.
The issue before the Alberta court was whether it should be inferred that a solicitation occurred from the fact that, using the form of proxy circulated by company management, numerous shareholders appointed the same individual as their proxy. The court refused to do so, dismissing the evidence assembled by the company as mere speculation. It highlighted that there is “no prohibition in securities or corporate law to prevent a security holder from appointing someone other than the management nominee as proxy[11]…” It further underscored that “the management proxy sent to debenture holders expressly provided for such an alternate choice[12]".
Communications by Target Companies
Taking Multiple Communications Together
It has been signalled multiple times that two or more communications (e.g., press releases) considered together can amount to a solicitation[14]. In one case the court indicated in obiter that the second, third and fourth in a series of press releases issued by a shareholder were a solicitation, including for (1) having been primarily directed at the company’s shareholders, (2) communicating that the shareholder had already secured significant support, (3) referring readers to a proxy solicitation firm for further information, and (4) having occurred in circumstances where it was clear proxies would later be solicited[15]. The court described these as “steps” in a “chain of communication designed to culminate” in changing the company’s board. However, it has also been signalled that it may be most appropriate to consider an individual communication “on its own”, albeit in its wider context[16].
Burden of Proof and Evidentiary Matters
The burden of proof will generally lie with the party alleging an unlawful solicitation of proxies has occurred. The standard of proof is the balance of probabilities[17]. Circumstantial evidence is admissible, but mere suspicion or plausibility is insufficient[18]. The court may require that the person making the communication establish that the requirements of an exemption are satisfied, e.g., that 15 or less shareholders were approached where the “quiet solicitation” exemption is relied on[19].
Concluding Comments
The relatively thin guidance given by Canadian courts regarding what constitutes a solicitation of proxies highlights the need for any potential activist to plan and implement its campaign in a cautious and deliberate manner. Conversely, should a potential activist appear on an issuer’s radar, the issuer should be diligent in monitoring the shareholder’s conduct for activity that tests the borders of the “quiet solicitation” and “public broadcast” exemptions and should be prepared to react accordingly.
