Soliciting Dealer Arrangements on Radar of Canadian Securities Regulators

Canada's securities regulators are seeking feedback from market participants on soliciting dealer arrangements employed in takeover bids, plans of arrangement, proxy contests and other M&A and securities transactions.

What are Soliciting Dealer Arrangements?

Soliciting dealer arrangements are relatively common in Canadian takeover bids and M&A voting transactions such as plans of arrangement. In takeover bids, a bidder will often pay fees to incentivise dealers to advise their securityholder-clients to tender to the bid. In voting transactions, a company may pay fees to incentivize dealers to advise their securityholder-clients to vote for the transaction (or against a competing transaction).

Less common and more controversial is the use of soliciting dealer arrangements in contested director elections, where a company pays fees to incentivize dealers to advise their securityholder-clients to vote in favour of management's director nominees—as in the 2013 proxy contest initiated by JANA Partners for Agrium and the 2017 proxy contest initiated by PointNorth Capital for Liquor Stores.

Potential Regulatory Issues and Feedback Sought

The staff notice published by securities regulators on April 12 highlights potential regulatory issues associated with soliciting dealer arrangements.1 In particular, regulators note that these arrangements raise questions regarding the appropriate management of dealer conflicts of interest, board entrenchment and the integrity of the tendering and securityholder voting process.

The regulators want to better understand market practices and ultimately determine whether guidance or rules are needed to regulate soliciting dealer arrangements. To that end, the staff notice poses a series of questions for consideration by market participants. We expect the following questions to generate the most feedback:

  • Are there circumstances in which you think it would be contrary to the public interest or inconsistent with a board of directors' fiduciary duties for an issuer to enter into a soliciting dealer arrangement?
  • Do you think that the potential conflict of interest on the part of an investment dealer or a dealing representative can be effectively managed?
  • What steps should a dealing representative take, beyond disclosure, to appropriately manage or avoid the conflict of interest?
  • Do you believe that an investment dealer or a dealing representative has a responsibility to encourage its client to respond to proxy solicitations, rights offerings, take-over bids or other corporate transactions such as conversion of convertible securities?
  • Are there particular transactions which give rise to more or less concern with respect to the use of soliciting dealer arrangements, for example,
    • a securityholder vote in relation to a merger and acquisition transaction, where the fee is contingent on the securityholder voting in favour of the transaction and/or the transaction being approved, or
    • a proxy contest, where the fee is contingent on the securityholder voting in favour of management's nominees and/or management's nominees being elected?

The deadline for submitting feedback to the securities regulators is June 11, 2018.

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1 See http://www.osc.gov.on.ca/documents/en/Securities-Category6/csa_20180412_61-303_sn-rfc-soliciting-dealer-arrangements.pdf.

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