In its recent decision in NorthWest Copper Corp., 2023 BCSECCOM 602 (NorthWest Copper), the British Columbia Securities Commission (Commission) dismissed an application by NorthWest Copper Corp. (NWST or the Company) alleging that three separate shareholders had been acting jointly or in concert, and that those shareholders had failed to make public “early warning” disclosure regarding their joint action and ownership of over 10% of the Company’s outstanding shares, as required by National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104).
The Commission’s decision provides greater clarity on an issue that is often raised by companies facing dissident actions by multiple shareholders. In particular, the decision sets a high threshold to establish joint actor relationships among shareholders who are engaged in discussions with each other regarding potential challenges to incumbent boards. The panel also reiterated prior decisions of securities regulators, cautioning that even where a breach of early warning rules is established, regulators will generally decline to grant remedies such as disqualifying votes or prohibiting solicitation. Instead, an order for remedial disclosure can be expected.
Background
The Company’s complaint resulted from actions initiated by two shareholders (Ianno and Sawiak, holding 3.9% and 0.4%, respectively) to seek changes to NWST’s Board of Directors (Board). In their engagements with the Board in 2022 and 2023, Ianno and Sawiak claimed to have the support of another large shareholder of NWST (Kimmel, holding 8.2%).
In May 2023, Sawiak delivered to NWST a notice of his intention to nominate a competing slate of directors at the Company’s 2023 annual general meeting (Meeting), in compliance with the advance notice provisions of the Company’s articles. In the notice, Sawiak stated that he was not acting jointly or in concert with any other person or company (i.e., neither Ianno, nor Kimmel). Sawiak subsequently issued a press release announcing his dissident slate of directors for election at the Meeting. The Company postponed the Meeting and sent a letter to Sawiak’s legal counsel, alleging that Sawiak had been acting jointly or in concert with Ianno and Kimmel.
The Company alleged that Kimmel’s agreement to contribute to Sawiak’s costs of the proxy solicitation was evidence that Kimmel had been acting jointly or in concert with Sawiak and Ianno. The Company also alleged that because Kimmel, Sawiak and Ianno owned more than 10% of the Company’s outstanding common shares in aggregate, the establishment of the alleged joint actor relationships among the three shareholders had triggered an obligation to file an early warning report under NI 62-104, and it was not necessary that any member of the group subsequently acquired shares after the formation of the group.
Having postponed the Meeting, NWST commenced an application to the Commission in August 2023, seeking orders prohibiting the respondent shareholders from exercising the voting rights attached to their shares with respect to the election of directors at the Meeting, requiring that the respondent shareholders cease trading in NWST’s shares for six months, and directing Sawiak to comply with the early warning rules.
B.C. Securities Commission Decision
The Commission panel hearing NWST’s application dismissed the matter.
Despite evidence of engagement and discussions between the respondent shareholders, the panel held that the Company had not met the onus required to establish that Kimmel had been acting jointly or in concert with the others. This meant that the 10% shareholding threshold in Section 5.2 of NI 62-104 was not met, and the early warning disclosure requirement contained in that provision was not engaged.
Although the panel’s decision was based on the specifics of the case, the panel’s consideration of the facts and its application of the legal standards of acting jointly or in concert established a high threshold and leaned towards allowing for freer engagement among shareholders.
The panel found that while Kimmel had engaged in discussions with Sawiak, he did not comport himself as a member of a group pursuing a common goal. Even the fact that Kimmel had agreed to contribute to Sawiak’s costs was not proof of any form of commitment or understanding to act in concert. Rather, the panel concluded that Kimmel’s conduct was consistent with an investor “keeping his powder dry” in the context of a proxy contest and identifying opportunities to advance his own interests, by one means or another. The panel found that Kimmel’s singular goal was to place his own representative on the Board, and accepted Kimmel’s evidence that at all times he acted independently in his own interests and was never party to a mutual understanding that he would vote with Sawiak and Ianno to install the dissident slate.
While Kimmel and Ianno had discussed their concerns about the Board and management, the panel found that their discussions did not result in a plan of action or a commitment to pursue it. In dealing with evidence that Sawiak had claimed to have the support of Kimmel, the panel noted that it did not matter what either Ianno or Sawiak thought about their relationship with Kimmel — it was Kimmel’s actual intentions and actions that had to be examined to determine whether he was acting jointly or in concert to achieve the election of Sawiak’s dissident slate.
Although the panel found that Kimmel had not acted jointly or in concert, rendering the remaining questions unnecessary, they opted to consider certain other issues raised in the case, providing helpful guidance for future proxy contests. In particular:
- The acquisition trigger. The panel rejected NWST’s assertion that no acquisition of shares is required to trigger an early warning filing. The panel noted that, if parties form a relationship acting jointly or in concert and thereby own, in aggregate, more than 10% of the outstanding shares, on the plain reading of the rules, the obligation to issue an early warning report only arises as a result of a subsequent acquisition of shares.
- The bar is (appropriately) high. The panel noted that the bar for a finding that parties are acting jointly or in concert is appropriately set relatively high under the case law, and that “disclosure of shareholder blocks is important, but so is the free flow of information and opinion among shareholders of a public company.” The panel concluded that it is better to insist on sufficiently clear, convincing and cogent evidence that parties are acting jointly or in concert and to risk that by doing so, some groups will fly under the radar, than to allow reliance on speculation to create a climate that stifles discussion among shareholders. A finding that parties acted “jointly or in concert” requires an applicant to demonstrate, on a balance of probabilities, that the parties worked together to achieve a joint specific purpose and were not simply aligned in interest and had discussed their respective interests and objectives.
- The appropriate remedy is disclosure — not disenfranchisement. Although no remedy was required, the panel noted that, had it decided in favour of NWST, any potential harm to investors caused by non-disclosure could have been addressed with a disclosure order, and that a prohibition on voting or similar restrictions on the exercise of shareholder rights would have been punitive and disproportionate to the alleged non-compliance.
Conclusion
The panel’s choice to address certain issues raised in NWST’s application when it was not required to do so suggests that the panel wished to send a message that allegations of the nature raised by NWST will have limited tactical value. The NorthWest Copper decision should also provide some comfort to shareholders that Canadian securities commissions recognize the importance of shareholder communication and will give shareholders considerable leeway to engage in conversations with dissidents.
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