The Ontario Superior Court of Justice recently issued its decision in Smoothwater Capital Partners LP I v. Equity Financial Holdings Inc. The decision deals with the interplay between the issuance of a press release by a company to address allegations levelled by a dissident shareholder and the proxy solicitation rules, which prohibit the solicitation of proxies without sending a proxy circular. The court affirmed that the existence of a proxy solicitation is a question of fact depending on the nature of the communication and the circumstances of the transmission. In the case at hand, the court concluded that the company did not violate the proxy solicitation rules as the “principal purpose” of the company’s press release was to provide certain explanations and defend its historical position, not to solicit proxies.
In November 2013, Smoothwater Capital Partners (“Smoothwater”) commenced a proxy battle seeking to replace seven of nine incumbent board members and appoint three new directors in order to form a board of five directors of Equity Financial Holdings (“Equity” or the “Company”).
Smoothwater proceeded to requisition a shareholders’ meeting and issued a series of press releases reflecting its intention. Smoothwater’s press release dated December 5, 2013 contained a lengthy and detailed criticism of Equity’s corporate governance practices as well as its management and board of directors. Equity responded on December 10, 2013 with its own press release, criticizing Smoothwater’s motives and qualifications while defending the Company’s record and touting past successes. At this time, neither party had sent a proxy circular to Equity’s shareholders.
An application to the Court was filed by Smoothwater alleging a breach of the proxy solicitation rules by Equity. Smoothwater took the position that Equity’s press release of December 10, 2013 was “calculated to result in the procurement or withholding of a proxy” and therefore constituted a “solicitation” as defined in s. 147 of the Canada Business Corporations Act (the Act). As Equity had not sent shareholders a management proxy circular in connection with the alleged solicitation, Smoothwater argued that Equity breached the provisions of s. 150 of the Act. Equity, on the other hand, argued that its press release was not a proxy solicitation but (i) disclosure intended to address inaccurate statements made by a dissident shareholder in its own press release and (ii) an attempt to keep its shareholders informed at a critical time.
The Court held that Equity’s press release was not a proxy solicitation and dismissed Smoothwater’s application. In coming to this conclusion, the Court accepted Smoothwater’s submission that “solicitation” is to be defined broadly and inclusively, and that the determination of the existence of a solicitation depends on the nature of the communication and the circumstances. However, the Court found that given the nature and circumstances of Equity's press release, it did not fall within this interpretation.
The Court also distinguished a number of prior decisions relied on by Smoothwater on the basis that the communications at issue in those decisions were all issued by shareholders and not the company, and in certain cases expressly referenced an intent to solicit proxies or involved the issuance of numerous press releases in contrast to the one press release in question issued by Equity.
The Court indicated that “it is inevitable that, when involved in a proxy fight, anything said by Equity could be characterized as a solicitation but the principal purpose of the document cannot be ignored.” Taking all of the factual circumstances into consideration, the Court found that the principal purpose of Equity’s press release was to defend, among other things, its history and leadership and take issue with Smoothwater’s track record given the criticisms levelled by Smoothwater, and that the press release stopped short of requesting proxies from shareholders. The Court also noted the Equity press release must be looked at on its own, and does not constitute a solicitation by the mere fact that Smoothwater had commenced a solicitation.
While target companies engaged in a proxy contest may applaud this decision for providing greater leeway to fight back against dissident shareholders without breaching the proxy solicitation rules, it will be interesting to see if the ruling can be equally relied upon by dissidents for their own benefit.
The proxy fight between Smoothwater and Equity remains ongoing. Equity’s annual and special meeting of security holders is currently scheduled for March 28, 2014.