Court Considers Corporate Disclosure In Face of Proxy Fight

In its recent decision in Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc.,¹ the Ontario Superior Court of Justice considered the interplay between corporate disclosure and proxy solicitation, and recognized that a corporation facing an attack from dissidents is able to make disclosure in response to the attack without necessarily breaching the proxy solicitation rules.

In November 2013, Smoothwater Capital Partners (Smoothwater) commenced a proxy fight, seeking to replace the board and senior management of Equity Financial Holdings (Equity). Smoothwater requisitioned a shareholders’ meeting and issued a series of press releases, one of which solicited proxies for its dissident slate of directors. That press release contained a lengthy and detailed attack on the financial performance of Equity and on its management and board of directors. Equity responded. Equity’s press release was critical of Smoothwater and defended the company's record and the conduct of management and the board, including the process the company was undertaking that included the establishment of a special committee to consider the dissident's initiative and value-enhancing alternatives. Neither Smoothwater nor Equity had delivered a proxy circular at the time of the exchange of the press releases that gave rise to litigation, and the shareholders' meeting was approximately 15 weeks away.

Smoothwater commenced an application and asked the Court to find that the press release issued by Equity was illegal proxy solicitation under the Canada Business Corporations Act and to make an order requiring future compliance with the proxy solicitation rules. The Court found that the press release was not proxy solicitation and dismissed Smoothwater’s application.  The Court accepted that "solicitation" under Canadian corporate law should be given the broad meaning urged by Smoothwater, but nonetheless the Court found that the Equity's press release did not fall within its ambit.

In dismissing Smoothwater’s application, the Court made a number of observations about the relationship between corporate disclosure and proxy fights:

• First, the Court observed that every statement made by a company in its disclosure in the face of a dissident attack cannot be construed as proxy solicitation. It is necessary to review the particular disclosure carefully to determine whether the company’s disclosure constitutes proxy solicitation.
   
• Second, disclosure made by a corporation defending the company in response to a dissident's attack must be viewed differently than public statements made by a dissident in furtherance of its objective. 

This approach to disclosure and the proxy solicitation rules provided Equity in this case with an opportunity to respond to the dissident's attack on the company’s record, its management and the board—the company was permitted to set out its own record to address the dissident, contrast incumbent management and the board with the dissident’s proposal to replace them, and explain the manner in which it intended to manage the process initiated by the dissident leading up to the recommendations the company would ultimately make to shareholders when soliciting proxies.

Along with recent Ontario decisions approving advance notice by-laws and permitting greater discretion in selecting the date of a requisitioned shareholders' meeting, the Smoothwater decision gives boards of directors more tools for responding to a dissident challenge.

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¹ 2014 ONSC 324. Torys LLP represented Equity Financial Holdings in this matter.