IIROC has published guidance1 for dealers about managing conflicts of interest arising from soliciting dealer arrangements. The guidance provides a roadmap for dealers based on IIROC’s existing conflict of interest rules in the context of takeover bids, plans of arrangement, proxy contests and other securities transactions involving various types of solicitation fees.
Although directed at dealers, IIROC’s guidance reflects a collaboration with securities regulators and follows each of their efforts in 2018 to consult with and obtain feedback from dealers, issuers, investors and other market participants. Endorsed by securities regulators, we expect IIROC’s guidance to influence issuers and boards of directors when they are considering what type of fee arrangements they should enter into with dealers in various transactions.
Potential conflicts of interest
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 incentivize 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.
IIROC has expressed particular concern about dealers’ ability to properly comply with conflict of interest rules, in particular Dealer-Member Rule 42 (DMR 42), when a soliciting dealer arrangement involves the payment of fees contingent on specific outcomes in a proxy contest. Compared with other M&A and securities transactions, contested director elections are, in IIROC’s view, unique insofar as they involve qualitative assessments—often without measureable or quantifiable supporting information—about an issuer’s future business strategy and the ability of competing slates of directors to successfully implement the strategy.
Conflicts of interest that should be avoided
IIROC’s DMR 42 requires dealers to avoid material conflicts of interest that cannot be managed in a fair, equitable and transparent manner. Based on this principle, IIROC’s guidance indicates that in contested director elections, dealers should avoid fee arrangements that involve
- payment only for votes in favor of one side, or
- payment only if a particular side is successful.
In light of this guidance, we expect that the above types of fee arrangements in contested director elections, which are already relatively rare, will cease to be part of Canadian market practice.
Other potential conflicts of interest
Other than in contested director elections with problematic fee arrangements, IIROC’s guidance indicates that dealers should consider, on a transaction-by-transaction basis and in light of the relevant facts and circumstances, whether they can adequately address conflicts of interest consistent with DMR 42. This facts and circumstances approach would apply, for example, in considering one-sided or contingency fee arrangements in contested transactions other than proxy contests, such as contested plans of arrangement. Fee arrangements that are neither one-sided nor contingent on a particular outcome may or may not raise conflicts of interest; dealers should assess this in accordance with their internal policies and practices designed to comply with DMR 42.
Disclosure about conflicts of interest
IIROC’s rules and guidance suggest that clients should be informed of conflicts relating to soliciting dealer arrangements in writing and in a manner that is
- prominent, complete, in one place and in plain language;
- specific to the particular arrangement and the conflict it raises; and
- detailed enough to enable the client to make an informed decision.
Moreover, under the IIROC directives, client-facing dealer representatives should consider explaining the nature of the conflict to clients and confirm that that they have read it. Dealers should also ensure that the relevant transaction disclosure document contains sufficient information about soliciting dealer arrangements.
Additional steps to manage conflicts
While the above disclosure is expected, it is not, in IIROC’s view, sufficient for addressing conflicts of interest. The regulator suggests that dealers should also identify how they have addressed a conflict, e.g., by ensuring that soliciting dealer arrangements are specifically considered in the dealer’s policies and procedures regarding, among other things, the nature of the client (retail or institutional, and the related suitability assessment) and the fee structure for the account (transaction-based or not). This process and assessment should be documented, as a particular soliciting dealer arrangement may be subject to compliance reviews.
1 IIROC Notice 19-0092 Managing Conflicts of Interest arising from Soliciting Dealer Arrangements, available at https://www.iiroc.ca/documents/2019/8655bc0b-d4fc-4aab-90eb-ebc5291f4bf9_en.pdf.
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