Managing Conflicts of Interest in Soliciting Dealer Arrangements

The Investment Industry Regulatory Organization of Canada (“IIROC”) recently released a guidance note (the “Guidance Note”) addressing conflicts of interest arising from the use of soliciting dealer arrangements in various circumstances, including take-over bids, plans of arrangement and proxy contests.[1] 

Soliciting Dealer Arrangements in Canada

“Soliciting dealer arrangements” are entered into between issuers or bidders and one or more registered investment dealers under which an issuer or bidder agrees to pay to certain dealers a fee for each security successfully solicited from shareholders to: (i) vote in connection with a transaction requiring shareholder approval; (ii) tender securities in connection with a take-over bid; (iii) participate in a rights offering or exercise rights to redeem or convert securities; or (iv)  attain the requisite approval for amendments to documents affecting shareholder rights in connection with corporate transactions.[2]  

Soliciting dealer arrangements are common in Canada in the context of take-over bids and plans of arrangement, where dealers are retained to solicit shareholders to tender to a bid or to vote in favour of a transaction, respectively. Such arrangements also exist, but are significantly less common, in the context of proxy contests.

Risk for Conflicts of Interest

The Guidance Note identifies that soliciting dealer arrangements may give rise to conflicts of interest that may or may not be manageable depending on the circumstances and emphasizes dealers’ obligations to comply with conflict of interest rules. Specifically, in addition to IIROC’s rules of general application addressing conflicts of interest, IIROC’s Dealer Member Rule 42 (“Rule 42”) requires that material conflicts of interest that cannot be managed in a fair, equitable, and transparent manner must be avoided altogether.

Soliciting Dealer Arrangements in Proxy Contests

As we have previously discussed, the use of soliciting dealer arrangements by incumbent boards in proxy contests has been criticized by some as “vote buying” and thus being contrary to the public interest. Such arrangements were used by the board of Agrium Inc. in the context of a proxy contest initiated by JANA Partners LLC in 2013 and the board of Liquor Stores N.S. Ltd. (“Liquor Stores”) in the context of a proxy contest initiated by PointNorth Capital Inc. in 2017. The Liquor Stores arrangement was unsuccessfully challenged at the Alberta Securities Commission which held that the arrangement was not “clearly abusive” and therefore not contrary to the public interest.  

In contrast, the Guidance Note acknowledges the significant conflict of interest inherent in the use of such soliciting dealer arrangements when fees are paid: (i) only for votes in favour of one-side; or (ii) only if a particular side is successful. The Guidance Note classifies such conflicts as generally unmanageable and to be avoided. As a result, it is unlikely that such soliciting dealer arrangements will be used in any further proxy contests in Canada.

Soliciting Dealer Arrangements in Other Contexts

With respect to the use of soliciting dealer arrangements in other contexts, the Guidance Note states that dealers should consider on a case-by-case basis whether they can adequately address material conflicts of interest in accordance with Rule 42.

As a result, dealers should have in place appropriate policies and procedures to perform such assessments to ensure compliance with Rule 42.

Addressing Conflicts in a Fair, Equitable and Transparent Manner

Where it is appropriate for dealers to address conflicts of interests arising from soliciting dealer arrangements, the Guidance Note proposes that such dealers must: (i) disclose the conflict; and (ii) identify how they have addressed the conflict in the best interest of shareholders. To enable shareholders to make informed decisions, the Guidance Note provides that at a minimum, disclosure should be:

  1. in writing, and provided in a timely manner so the shareholder has sufficient time to make a fully informed decision;
  2. specific to the arrangement and the conflicts it raises, including: (i) who is paying the fee; (ii) who is receiving the fee; (iii) whether the fee is contingent on the shareholder voting in a certain manner and/or a specific outcome occurring; and (iv) whether the fee is subject to any minimum or maximum payments and any other conditions;
  3. understandable to the shareholder; and
  4. prominent, complete, in one place and in plain language.[3]

In addition, the Guidance Note recommends that shareholder-facing representatives of the dealer explain the nature of the conflict to shareholders and, if relevant, confirm that the shareholders have read the disclosure. 

Ultimately, IIROC’s Guidance Note is significant as it will: (i) eliminate the use of one-sided soliciting dealer arrangements in proxy contests; (ii) require dealers to engage in a transaction-by-transaction analysis to assess conflicts of interest arising from soliciting dealer arrangements; and (iii) impose higher standards for disclosure by dealers to clients to address conflicts of interest arising from the use of soliciting dealer arrangements.

 

[1] IIROC Notice 19-0092 Managing Conflicts of Interest arising from Soliciting Dealer Arrangements, available at https://www.iiroc.ca/documents/2019/8655bc0b-d4fc-4aab-90eb-ebc5291f4bf9_en.pdf (the “Guidance Note”).

[2] The Guidance Note; CSA Staff Notice 61-303 and Request for Comment – Soliciting Dealer Arrangements available at https://www.osc.gov.on.ca/documents/en/Securities-Category6/csa_20180412_61-303_sn-rfc-soliciting-dealer-arrangements.pdf (“CSA Staff Notice”).

[3] The Guidance Note.

IIROC Investment Industry Regulatory Organization of Canada regulatory guidance securities take-over bid proxy contest conflicts of interest

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