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Securities Regulators Set “High Bar” for Establishing Joint Actors

A recent British Columbia Securities Commission (BCSC) decision in NorthWest Copper Corp.[1] appears to impose a relatively high bar to proving that shareholders are acting “jointly and in concert” for the purpose of early warning disclosure requirements under securities law. The decision, which followed an earlier 2023 decision concerning joint actorship by the Alberta Securities Commission (ASC) in Re DIRTT Environmental Solutions Ltd.,[2] has important implications for market participants considering or engaging in proxy contests and M&A transactions. 

The Complaint

NorthWest Copper Corp. (NorthWest or the Company) received advance notice from 0.4% shareholder Grant Sawiak (Sawiak) of his intention to nominate a dissident slate of directors at its upcoming annual and general meeting of shareholders (AGM). The notice expressly stated that Sawiak was “not acting jointly or in concert with any other person or company…”. In response, on the basis of concerns about Sawiak’s alleged joint actorship with certain other investors in the Company (a defensive tactic commonly employed by issuers in recent years), NorthWest postponed the AGM and brought an application before the BCSC against three shareholders, Sawiak, Tony Ianno (holding approximately 3.9% of NorthWest’s shares) (Ianno) and John Kimmel (Kimmel) (holding approximately 8.2% of NorthWest’s shares) (together, the Respondents):

  •      alleging that (a) Sawiak was acting jointly or in concert with the other two Respondents, (b) they collectively, as joint actors, owned more than 10% of the Company’s common shares, and (c) they had failed to comply with the early warning requirements of National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104) and National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103); and

  •      seeking orders prohibiting the Respondents from voting their shares to elect directors of the Company at the AGM, cease trading the Respondents from trading in the Company’s shares for six months, and directing Sawiak to comply with the disclosure requirements in NI 62-104 and NI 62-103.

As a general proposition, the onus for establishing that shareholders are acting jointly or in concert is on the party making the allegation to demonstrate, on the balance of probabilities, using clear and cogent evidence that the persons have (a) an agreement, commitment or understanding to (b) acquire or tender securities or exercise voting rights attaching to securities.

In NorthWest, the Company’s application focused on numerous alleged facts as the basis for its complaint, including the following:

  •      A month after first proposing a proxy fight, Ianno proposed that both he and Kimmel should have representation on NorthWest’s board;

  •      Ianno presented himself to NorthWest (and others) as having several investors, including Kimmel, aligned with him and his desire for change at the Company and Sawiak described his slate as being the consensus of multiple shareholders, including Ianno;

  •      Ianno purchased shares with a $500,000 loan from Churchill Industries Inc. (Churchill), a company controlled by Kimmel;

  •      Ianno recruited Sawiak to help him make changes to the NorthWest Board, and proposed a reconstituted board that would include both Sawiak and a representative of Kimmel;

  •      Each of Ianno, Sawiak and Kimmel attempted to recruit people to join the slate of proposed directors that Sawiak ultimately put forward, sometimes together, including Adam Manna, Kimmel’s personal lawyer and corporate counsel to Churchill;

  •      Ianno and Sawiak both had discussions with NorthWest in which they presented themselves as aligned and making decisions together;

  •      Sawiak included Kimmel’s chosen representative (Manna) on the dissident slate;

  •      Kimmel agreed to contribute to the costs of Sawiak’s proxy solicitation;

  •      In response to NorthWest’s announcement of its postponed AGM and record date, Sawiak’s amended nomination notice disclosed that Sawiak and Kimmel were bearing the cost of any solicitation and modified the statement in Sawiak’s original notice that Sawiak was not acting concert with any person with the language “except as disclosed below, the nominating shareholder is not acting jointly or in concert with any person…”; and

  •      Kimmel and Ianno ultimately provided their proxies to Sawiak (in the case of Kimmel, after his private negotiations with NorthWest to secure representation on its board broke down).

The BCSC Decision

In considering the core issues before the panel, including whether the Respondents were acting jointly or in concert, the BCSC focused on the role of Kimmel, on the basis that any finding that the Respondents collectively owned or controlled 10% or more of NorthWest’s common shares depended entirely on Kimmel’s holdings being combined with Sawiak’s and Ianno’s. The BCSC dismissed the Company’s application, holding that the Company had not demonstrated that Kimmel was acting jointly or in concert with the other Respondents. Specifically:

 

  1.        Kimmel’s discussions with Sawiak did not rise to the level of them forming a group to pursue a common goal. Sawiak alone selected the nominees for his dissident slate, even though Kimmel suggested one candidate. Moreover, Kimmel’s agreement to contribute to Sawiak’s costs was not, on its own, proof of any form of commitment or understanding that he intended to act jointly or in concert with Sawiak because he was not involved in the planning or preparation of the solicitation. In sum:

Sawiak’s evidence was clear: he did not believe that Kimmel would necessarily support the dissident slate, but he hoped that Kimmel would do so….[3]

The problem for [the Company] on this application is that it does not actually matter what either Ianno or Sawiak thought about their relationship with Kimmel. If Kimmel was not himself engaged in an active and coordinated effort to achieve the result that the dissident slate would be installed at the AGM, then he was not acting jointly or in concert with the other Respondents. …[4]

Kimmel’s conduct throughout was consistent with an investor “keeping his powder dry” in the context of a proxy contest and identifying opportunities to advance his own interests. Regardless of what Sawiak and Ianno may have thought, we accepted Kimmel’s evidence that at no time was he party to a mutual understanding that he would vote with them to install the dissident slate. His goal was simply to place his representative on the board, by one means or another.[5]

 

  1.        Kimmel’s evidence was accepted that Ianno had no authority to speak on his behalf to the Company and he was neither aware of nor privy to those conversations, that he never considered himself to be in a group with Ianno, and that Ianno never had control over Kimmel’s shareholdings. The BCSC found that “[i]t is possible that Ianno thought that he had an understanding with Kimmel that Kimmel would support the dissident slate. It is also possible that [Ianno] … was exaggerating the situation, using the idea of Kimmel’s participation as a bluff in order to get what he wanted.”[6]

 

  1.        Faced with “considerable evidence of a significant level of engagement” between Sawiak and Ianno, the BCSC noted that “it may well be that they were acting jointly or in concert”. It declined to reach a conclusion because doing so was unnecessary given their combined holdings did not exceed 10% of the Company’s outstanding shares.

 

Key Takeaways

The decision, along with the ASC’s prior decision in Re DIRTT, provide welcome clarity concerning the framework that commissions and courts ought to apply when faced with joint actor complaints, suggesting that issuers or targets should be cautious if considering leveraging joint actor complaints in an effort to delay or undermine would-be activists or acquirers.

  1.        “Joint actorship” applies to shareholder activism and not just take-over bids. Despite some ambiguity in NI 62-103 and NI 62-104, the concept of “acting jointly or in concert” does apply to proxy solicitations for the purpose of voting on an alternate slate of directors, and is not confined solely to the context of an issuer bid or take-over bid. 

  2.        There must be an “acquisition” of shares, not merely “joint actor” formation, to trigger early warning reporting. The obligation in NI 62-104 to file an early warning report arises only when one of the joint actors acquires shares after the group is formed. Therefore, once a joint actor relationship is found, it will be important to determine both (a) when it came into being, and (b) whether there was a subsequent acquisition by one of the joint actors that took the group’s holdings over the 10% threshold. 

  3.        An agreement, commitment or understanding for a specific purpose or planned result is required. Shareholders having discussions about their concerns with an incumbent board and management will not alone constitute a plan of action or a commitment to pursue it; nor will a mere alignment of interests or common interests. There must be evidence of some “agreement, commitment or understanding” among the parties (which can be something less than a “formal” agreement) and a “common specific purpose” or “planned result” or a “mutual understanding about how each Respondent would vote the shares he owned or controlled.”[7]

  4.        The bar to establish joint actors is appropriately set high. The BCSC imposed a relatively high bar to establishing that shareholders are acting jointly and in concert. The onus falls on the person alleging joint actorship to prove it on a balance of probabilities, requiring clear, convincing and cogent evidence. While circumstantial evidence is permitted to assist in determining whether the test has been met, inferences drawn must be reasonable and supported by evidence, not merely hypothetical or speculative or assumed facts. 
  5.        Remedies should be focused on protecting investors and maintaining fair and efficient capital markets, not be punitive or remedial. Even in instances where parties have failed to disclose a joint actor relationship and thus breached the early warning requirements, securities regulators will be loathe to grant relief that has the effect of giving an issuer a tactical advantage, influencing the outcome of a contest or disenfranchising shareholders of their rights, including sterilizing investors’ voting rights. “Where better disclosure would solve the problem, that, rather than disenfranchisement, should be the remedy.”[8] As such, rectifying disclosure is very likely the typical remedy required in such cases.

In addition to the above key takeaways from the case, the BCSC acknowledged that as a result of some of its findings, including the high bar its framework establishes, there is an acceptable risk that some groups may fly under the radar and some joint action will fall outside the scope of the early warning requirements. In doing so, the BCSC articulated that while disclosure of shareholder blocks is important, so is the “free flow of information and opinion among shareholders of a public company” as an important policy objective.[9] As a result, speculation should not be permitted to stifle discussion among shareholders.

Nonetheless, given the prevalence of “joint actor” allegations being leveraged to seemingly defend against both activism and unsolicited M&A and the real chilling effect such allegations can have, even if not ultimately successful, shareholders should remain vigilant when interacting with each other on matters of common interest given the BCSC’s caution that the alleged joint actors’ explanations will be subject to “a very careful and skeptical review” for “credible and plausible” explanations of the impugned conduct and intentions.[10] Issuers concerned about potential joint actorship among their investors who are agitating for change should also carefully consider the legal and practical implications of making such complaints, which may be perceived as self-serving, defensive and in aid of entrenchment, while lacking any meaningful impact on the outcomes.


 


[1] 2023 BCSECCOM 602.

[2]2023 ABASC 32 [Re DIRTT].

[3] Ibid. at para. 193.

[4] Ibid. at para. 194.

[5] Ibid. at para. 212.

[6] Ibid. at para. 192.

[7] Ibid. at paras. 199-200.

[8] Ibid. at para. 211.

[9] Ibid. at para. 204.

[10] Ibid. at paras. 197-8.

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