How much can shareholders of a public company (or “issuer”) share information and collaborate in their activism before they are deemed to be acting “jointly or in concert” under applicable securities legislation? And if they are, what is the recourse for an issuer? A recent decision of the British Columbia Securities Commission (the “Commission”) in NorthWest Copper Corp. (2023 BCSECCOM 602, “NorthWest”) suggests that the free flow of information and opinions among shareholders outweighs, in regulators’ minds, a company’s right to receive disclosure of shareholder blocks. The decision follows an earlier decision of the Alberta Securities Commission (ASC) in Re DIRTT Environmental Solutions Ltd. [1] on similar questions of joint actorship, suggesting a potentially developing regulatory consensus favouring shareholder enfranchisement and collaboration over an issuer’s ability to defend themselves in joint actorship or take-over bid situations.[2]
In addition to deciding the matter on the specific facts, the commission also offered valuable guidance for when issuers find themselves facing multiple dissidents aligned in their activism. As we enter proxy season, it is important for issuers to understand the implications of the decision on their ability to defend in proxy contests.
Background on the Case
NorthWest Copper (“Company”) filed a complaint with the British Columbia Securities Commission after two shareholders notified the company of a slate of directors in contest to the Company’s nominees at the upcoming annual meeting (“NWC Shareholder Meeting”). While these shareholders only held 4.3% of the company, they had reported that they had the support of a third shareholder who held 8.2%. Since the combined shares would put the dissident shareholders over the 10% threshold, the Company alleged that the group was required to file an early warning report under the provisions of NI 62-104 and that, because they had not, the dissident shareholders should be prohibited from exercising their voting rights at the NWC Shareholder Meeting. The Company claimed that the obligation to file the early warning report was triggered, even though no member of the group acquired additional shares after the alleged formation of the group.
Joint Action Not Established
While there was no contention over the issue of whether the first two shareholders acted jointly or in concert, the Commission held that the company failed to establish that the third shareholder was included in that joint action. Therefore, the 10% threshold was not met to trigger the requirement for early warning disclosure. While the third shareholder had discussions with the other two and even consented to contribute to the cost of the proxy solicitation, the Commission said this did not constitute proof of a commitment or understanding that the third shareholder would act in concert with the other two. Instead, the Commission panel accepted the third shareholder’s assertion that he acted independently in his own interests, with a singular goal to install his own representative on the board.
The Commission pointed out that even if the first two shareholders thought that the third shareholder had agreed to vote with them, their opinions were irrelevant. What mattered was the intention of the third shareholder. If he “was not himself engaged in an active and coordinated effort to achieve the result that the dissident slate would be installed at the AGM, then he was not acting jointly or in concert with the other Respondents,” the Commission panel explained.[3]
Guidance for Future Situations
The finding that there were not enough shareholders acting in concert to trigger the early warning requirement was sufficient to conclude the case. However, the panel also went further to address some additional issues that provide guidance for future situations. Key takeaways include:
- The Trigger for Early Warning Report on Joint Action is Subsequent Purchase – Not Formation. The Commission panel held that a clear reading of the rules shows that if parties form a group to act in concert and the group controls more than 10% of shares, the group is only required to file an early warning report after someone in the group acquires additional shares subsequent to the formation of the group – not on the mere formation of the group.
- High Bar to Establish that Shareholders are Acting Jointly or in Concert. The panel noted that it should be difficult to prove that parties are acting jointly or in concert in order to allow for the “free flow of information and opinion among shareholders.”[4]
- Remedy for Undisclosed Joint Action Is Disclosure – Not Disenfranchisement. The panel noted that because the right of shareholders to elect directors is so important, if disclosure would solve the problem, then that should be the remedy rather than “disenfranchisement” (i.e. disallowing their right to vote for non-disclosure). This is very consistent with the Alberta Securities Commission’s decision and reasoning in Re DIRTT.[5]
- Free–Flow of Information Among Shareholders More Important than Issuers Knowing About Shareholder Blocks. “We conclude that it is better to insist on sufficiently clear, convincing and cogent evidence that parties are acting jointly or in concert and take the 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.”
This NWC decision could make it difficult for companies to establish that shareholders are acting jointly and, by extension, defend against dissident activity once it has begun. However, it is consistent with securities commissions’ mandates across Canada to favour information and market empowerment (via symmetry of information and better shareholder engagement) over issuers’ ability to defend themselves and for Boards/management to remain entrenched. If you have questions or concerns about the future impact of the Commission’s opinion, someone from our business law group would be happy to discuss.
[1] Re DIRTT Environmental Solutions Ltd., ABASC 32 [Re DIRTT]
[2] Note that both the NorthWest and Re DIRTT decisions were made by the applicable regulators under the same general forms of national instrument as has also been adopted by Ontario. The applicable instruments are National Instrument 62-103, on issues of joint actorship, and National Instrument 62-104 on matters of take-over bids, respectively)
[3] NorthWest Copper Corp., 2023 BCSECCOM 602, paragraph 94.
[4] NorthWest Copper Corp., 2023 BCSECCOM 602, paragraph 204.
[5] Re DIRTT, paragraph 116. The ASC panel noted that section 179 of the Alberta Securities Act, which deals with applications by an interested person to the ASC to remedy non-compliance by a third person, did not give the ASC the “jurisdiction to disenfranchise shareholders”.