Five Key M&A Cases from 2017 to consider this proxy season
Heading into the 2018 proxy season, we have summarized five Canadian M&A cases from 2017 and their potential impact. This article should be read together with our recent post summarizing some of 2017’s most noteworthy developments in governance and disclosure requirements and guidelines.
1. Residual uncertainty remains on the standard applicable to fairness opinions in plans of arrangement
On February 22, 2017, the Yukon Supreme Court (“YKSC”) approved an amended plan of arrangement for InterOil Corporation (“InterOil”) to be acquired by Exxon Mobil Corporation (“Exxon”) (“InterOil #2”). The YKSC decision leaves residual uncertainty that has persisted since the 2016 decision of the Yukon Court of Appeal (“YKCA”) in InterOil Corporation v. Mulacek (“InterOil #1”). InterOil #1 surprised many Canadian M&A lawyers because the YKCA reversed the lower court’s approval of the original plan of arrangement notwithstanding the significant premium offered by Exxon and its approval by 80% of InterOil shareholders who voted at the meeting.
In InterOil #1, the YKCA identified a number of “red flags” with the transaction, including the board process followed, disclosure to shareholders, and deficiencies with the fairness opinion opining that Exxon’s offer was fair to InterOil shareholders from a financial perspective. Most M&A lawyers believed that the fairness opinion relied upon by InterOil’s board complied with industry norms. However, the YKCA criticized it for, inter alia (a) containing little information about its methodology and analysis, and (b) being given by an expert whose compensation was based on the transaction’s successful outcome (a “success fee”). The YKCA was also critical of the InterOil special committee that had negotiated with Exxon for not being comprised entirely of independent directors.
In InterOil #2, the YKSC noted that the amended plan of arrangement had been “enhanced” and the procedure and corporate governance had been “considerably improved”. The amended arrangement was overseen by an independent committee of InterOil directors, enhanced disclosure was provided to shareholders, the independent committee relied upon a detailed fairness opinion prepared by a different investment bank on a flat-fee basis, and the amended agreement was approved by over 90% of InterOil’s shareholders voting at the meeting. The YKSC emphasized that it took comfort from the second fairness opinion because, among other things:
- it was given by a reputable investment bank;
- the investment bank’s compensation was on a fixed-fee basis, payable regardless of whether the amended arrangement was ultimately completed;
- it set out “in detail” the materials reviewed and assumptions made; and
- it explained the valuation methodologies considered.
Going further, the YKSC held that the second fairness opinion provides “a useful template” for the detail that fairness opinions should provide to shareholders and to courts, and that “[i]t is not acceptable to proceed on the basis of a fairness opinion which is in any way tied to the success of the arrangement.”
- The InterOil decisions establish a new “minimum standard” for fairness opinions supporting plans of arrangement put before the courts in the Yukon Territory, British Columbia, Northwest Territories and Nunavut. It is too early to tell if the same approach will be followed by courts in other Canadian jurisdictions. So far, market practice has not changed in any consistent way. Nevertheless, because the InterOil decisions will surely be relied upon in contested situations, all Canadian public companies should give appropriate consideration to whether a fairness opinion should (i) be provided by a financial advisor paid on a flat-fee basis and, if a success-fee is paid, whether that fee arrangement should be fully disclosed to shareholders; (ii) disclose further substantive analysis underlying the opinion; and (iii) expressly address any non-cash consideration forming part of the transaction.
- Other lessons from the InterOil decisions — enhanced shareholder disclosure in certain circumstances, the need for special committees negotiating significant/related-party transactions to be independent, the necessity of following expert evidence rules and cross-examinations — have been echoed by previous cases in other Canadian jurisdictions.
2. Soliciting dealer fees may be used in a proxy contest absent “clearly” abusive conduct or actual harm
On July 18, 2017, the Alberta Securities Commission (“ASC”) released its written reasons in Re PointNorth Capital Inc.,  clarifying the breadth of the securities commissions’ public interest jurisdiction in the context of a proxy battle.
PointNorth Capital Inc. (“PointNorth”), a major shareholder in Liquor Stores N.A. Ltd. (“Liquor Stores”) sought control of the Liquor Stores board. In the ensuing proxy contest, the parties had difficulty contacting Liquor Stores’ shareholders who were “objecting beneficial owners” (“OBOs”) – i.e., shareholders who did not allow their identities or contact information to be given to the issuer.
After proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) announced its support for the Liquor Stores incumbent slate, the Liquor Stores board paid “soliciting dealer fees” to incentivize dealers to inform OBOs about ISS’ recommendation and to facilitate voting for the incumbents’ slate. PointNorth commenced a proceeding before the ASC arguing that the provision of financial incentives to brokers by the Liquor Stores board was contrary to the public interest.
The ASC held that to exercise its public interest jurisdiction absent a breach of securities law (there was none), the impugned conduct must be “clearly abusive” behavior. It determined that the Liquor Stores board’s arrangement with dealers was not clearly abusive, largely because PointNorth had failed to demonstrate actual harm to anyone. The ASC also held that without evidence, it would not assume that brokers would not adhere to their legal and ethical duties to their clients.
- PointNorth Capital is the first time a Canadian securities regulator has commented on “soliciting dealer fees”. In Canada, such fees have been utilized in many M&A transactions and a handful of proxy contests. The most high-profile use of such fees was by Agrium Corporation in the proxy contest initiated by JANA Partners LLC in 2013. Despite considerable scrutiny (and negative commentary), Canadian securities regulators did not prohibit the practice or issue any commentary or warning to market participants.
- The ASC’s reasons do not purport to establish any broad principles applicable to soliciting dealer fees. Given ongoing negative commentary, it would not be surprising for such fee arrangements to be scrutinized further in another proxy contest, perhaps in court.
- We are unaware of dissidents using soliciting dealer fees in any Canadian proxy contest. When incumbents use such fees, they should give specific consideration to whether the use of company funds to support the incumbent slate is in the best interests of the company.
3. Tactical share issuance aimed at influencing a proxy contest may not pass regulatory scrutiny
In the midst of a proxy contest, the board of Eco Oro Minerals Corp. (“EOM”) approved the issuance of EOM shares shortly before the record date for a contested shareholders meeting. Litigation ensued before both the Ontario Securities Commission (“OSC”) and the B.C. Courts.
On April 23, 2017, the OSC set aside the decision of the Toronto Stock Exchange (“TSX”) approving the issuance of EOM shares on a partial conversion of unsecured convertible notes equal to approximately 10% of the outstanding common shares (the “New EOM Shares”), without requiring prior shareholder approval of the issuance (the “Impugned Transaction”). The TSX had approved the Impugned Transaction and an unannounced, accelerated closing but was unaware that: (i) a proxy contest was underway, (ii) a meeting requisitioned by dissident shareholders was imminent and the record date was only days away, and (iii) support letters were solicited by management and provided by almost all of the recipients of the New EOM Shares.
The OSC determined that EOM’s incumbent board had a “tactical motivation” as the Impugned Transaction “sought to influence the vote at the upcoming Meeting that would decide whether the Board would be removed”. As a remedy, the OSC ordered that the New EOM Shares not be voted in the proxy contest unless the issuance was approved by shareholders, as required by the TSX Rules.
Meanwhile, a different outcome was reached in parallel litigation commenced by the dissidents before the B.C. Supreme Court. In Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp,  the same dissidents who had commenced the OSC proceeding sought an order from the B.C. Court that the issuance of the New EOM Shares was oppressive and should be set aside or, in the alternative, that the New EOM Shares not be voted at the contested meeting.
The Court concluded that the test for oppression had not been met because, among other things, there was no evidence that the Impugned Transaction was not in the best interests of EOM, the dissidents knew that the unsecured convertible notes were outstanding and convertible when they purchased EOM securities, and it was not unreasonable for the holders of the unsecured convertible notes to want to vote at the contested meeting. Moreover, the Court deferred to the business judgment of EOM’s board and concluded that the dissidents had not proven that the Impugned Transaction was “unreasonable in all the circumstances”.
After the OSC decision was released, the B.C. Court issued an order adjourning the meeting because of the apparent conflict between the Court’s order and the OSC’s order. The B.C. Court of Appeal set aside the adjournment order, holding that there was no actual conflict because securities and corporate law serve separate purposes. The B.C. Court also rejected EOM’s argument that the dissidents had improperly pursued separate avenues for relief from the same underlying facts.
- Tactical share issuances (and other tactical measures) during a proxy fight are likely to be subjected to considerable scrutiny before the courts, securities regulators and/or stock exchanges. In each forum, the parties must lead compelling evidence about the bona fides of the transaction (i.e. its valid business purpose), the urgency and necessity of the transaction, and the board’s motives and business judgment.
- Alleged tactical measures by incumbents during an ongoing proxy fight have previously been challenged in courts and before securities regulators. In these circumstances, the dissidents launched parallel proceedings before the court and the regulator, resulting in an advantageous overall outcome. As always, the pros and cons of litigating in either forum should be carefully considered.
- The B.C. court ultimately deferred to the business judgment of EOM’s board. In contrast, the OSC did not even consider the board’s business judgment. In fact, the OSC specifically stated that it would not engage in an “assessment of whether [the board…] conducted itself in accordance with the standards set out in governing corporate statutes, including the business judgment rule”.
- The OSC was troubled by EOM’s failure to inform the TSX that the New EOM Shares were being issued in the context of a proxy contest and that the shares would be voted in favour of the incumbent board at the contested meeting. If TSX approval had been granted in the face of such disclosure, it is unclear if the OSC would have nevertheless required a shareholder vote on the Impugned Transaction. This may be so, given the OSC’s comment that “in the context of a close vote on a board election such as this, the TSX should generally exercise its discretion to require a vote to promote the fair treatment of shareholders and the quality and integrity of Ontario capital markets”. In any event, the TSX will probably seek additional information from companies about the circumstances surrounding share issuances and may be less willing to approve unannounced and accelerated closing of such issuances.
4. Guidance on when boards may refuse a shareholder requisition because of the “personal grievance” exception
In Koh v Ellipsiz Communications Ltd., Ontario’s Divisional Court considered whether the board of a company (“ECL”) had appropriately refused to call a special shareholder meeting because the meeting was requisitioned by a shareholder to address alleged personal grievances.
Koh, holding approximately 42% of ECL’s shares, submitted a requisition proposing that a meeting be convened to consider two resolutions: a resolution to remove three directors and, if approved, a further resolution to elect three new directors identified in the requisition. ECL’s board declined Koh’s requisition on the basis that it was for the primary purpose of redressing a personal grievance against ECL or its directors. Section 105(3)(c) of the Business Corporations Act (Ontario) allows a board to refuse to call a requisitioned meeting when it is “clearly apparent” that the purpose of the requisition is to address a shareholder’s personal grievances. Among the personal grievances the ECL board attributed to Koh were (a) Koh’s desire to be chairman of ECL, and (b) Koh’s desire to negotiate a potential transaction and to arrange financing for the same.
Koh commenced litigation to compel ECL’s directors to call the requisitioned meeting. The Superior Court of Justice was satisfied that Koh’s requisition sought to address personal grievances and declined to order the shareholder meeting. On appeal, the Divisional Court agreed with Koh that the alleged personal grievances predominantly related to his legitimate differences of opinion regarding the business steps that should be taken by ECL.
The Divisional Court held that in assessing whether the personal grievance exception applies, one must “look beyond the language of the proposed resolutions to determine the ‘primary purpose’ for which they are put forward”. A personal grievance may exist if the “subject matter of that grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder.” In other words, “while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance.” In the result, the Divisional Court allowed the appeal and ordered ECL to call a shareholder meeting to vote on the Koh resolutions.
- The Divisional Court’s reasons provide some guidance on what constitutes a shareholder’s “personal grievance”, thereby permitting a board to decline a shareholder requisition. Prior to Koh, there was no Canadian jurisprudence directly on point.
- Courts will not defer to the business judgment of directors who refuse a shareholder requisition by relying on an exception. A shareholder’s right to requisition a shareholder meeting is a “fundamental right” afforded by several Canadian corporate statutes. The Divisional Court noted that “in deciding on the application of the exception, a Board of Directors is not making a business decision and, accordingly, the business judgment rule does not apply.”
5. Courts remain reluctant to interfere with contested shareholder meetings absent evidence of impropriety
In Goldstein v. McGrath, the B.C. Supreme Court declined to interfere with the calling of a special shareholder meeting to determine the proxy contest for control of Photon Control Inc. (“Photon”). Photon’s board was deadlocked into two groups of three directors: the “McGrath Group” and the “Goldstein Group”.
The McGrath Group had submitted a requisition for a special shareholders meeting aimed at breaking the deadlock. When the board did not call the meeting (because of the deadlock), the Goldstein Group petitioned the Court to order a shareholder meeting under s. 186 of the Business Corporations Act (British Columbia) (“BCBCA”) before the next AGM. That section permits the Court to order a shareholders meeting where it is, among other things, “impractical” to do so or for any reason the Court considers appropriate. The McGrath Group also commenced litigation seeking similar relief.
The Court disagreed with the Goldstein Group that an earlier shareholder meeting in May was necessary because the board deadlock would make it “impractical” to call the AGM scheduled in August. The Court found this argument “purely speculative”. Similarly, the Court found it was not “impractical” for the McGrath Group to call a special meeting, as permitted by the BCBCA.
The Court dismissed the McGrath Group’s argument that Photon should pay the expenses of each side for the court-ordered meeting. The relief sought amounted to an order that the company pay both sides’ expenses for a full proxy battle. The Court refused to intervene, noting that even if there were to be a court-ordered meeting, each side would be required to pay its own costs for a proxy battle. Because the board is evenly split, each side stands on the same footing as individual shareholders who fund their own proxy battles.
Lastly, the Court did not appoint an independent chairman for the next shareholder meeting because there was no evidence that the board’s chair was “likely to conduct the meeting inappropriately”. In keeping with past jurisprudence, the Court held that “[a]n apprehension of bias is not sufficient to merit an independent chairperson”, “[e]xisting directors will always have an interest in the outcome of a meeting in which their election is to be considered”, and “past personal attacks in the context of proxy battles do not disqualify a person from acting as a chairperson”.
Goldstein confirms the general reluctance of courts to interfere in the management of corporations, particularly where shareholders may avail themselves of a statutory procedure to resolve the underlying issue. This case also highlights the potential deadlock problems that may arise when a board is constituted by an even number of directors.
 InterOil #2, supra at para. 17.
 InterOil #2, supra at para. 18.
 InterOil #2, supra at para. 11.
 The Yukon Court of Appeal is made up of justices of the British Columbia Court of Appeal and justices from the Yukon Territory, Northwest Territories, and Nunavut. Therefore, InterOil #1 is expected to be given significant weight in these other jurisdictions.
 EOM – OSC, supra at paras. 151-152.
 EOM – BCSC #1, supra at para. 77.
 EOM – OSC, supra at para. 139.
 EOM – OSC, at para. 153.
 The TSX has recently revised its Form 11 (Notice of Private Placement) to include information about possible dissident action and proxy fights.
 Koh, supra at para. 15(c).
 Koh, supra at para. 37.
 Koh, supra at para. 16.
 Koh, supra at para. 15(b).
 Goldstein, supra at para. 15.
 The Court cited Canadian Javelin Ltd. v. Boon-Strachan Coal Co., 1976 CarswellQue 103 (QC SC), Pala Investments Holdings Ltd. v. Bristow, 2009 BCSC 680, and National Instrument 51-102 – Continuous Disclosure Obligations.
 Goldstein, supra at para. 30.
activism activist advisor BCSC defensive tactics disclosure Eco Oro fairness opinions Impractical InterOil ISS oppression OSC PointNorth public interest Regulator shareholder meeting soliciting dealer fees special meeting tactical plan