SECURITIES REGULATION AND IR

A proxy battle is about winning a voting contest. One tactic used by the winner in a particularly acrimonious proxy battle earlier this year has triggered a debate over whether the payment of success fees to soliciting dealers should be permitted in Canada.

Agrium Inc. (“Agrium”) nominated a slate of directors for election at its 2013 annual meeting. Prior to the meeting, JANA Partners LLC (“Jana”), a shareholder of Agrium, nominated its own slate of directors for election. Each of Jana and Agrium argued that they were nominating the directors who were best equipped to lead Agrium. By the time all the dust had settled, Agrium’s nominees had been successfully elected to the board.

On April 1, 2013, Jana issued a press release stating that Agrium was paying brokers and investment advisors to cause their clients to vote for Agrium’s board nominees. The following extract of a private memorandum from Agrium was reproduced in a press release: “Agrium will pay members of the Soliciting Dealers Group who facilitate the voting of shares by retail beneficial owners of shares resident in Canada, a fee of C$0.25 per share for each share voted in favour of the Agrium Nominees, provided that the fee in respect of any single beneficial owner of shares shall not be less than C$100 (provided that such beneficial owner holds a minimum of 30 shares) or more than C$1,500. No solicitation fees will be payable if the slate of Agrium Nominees are not elected in full to the Board....”

In Canada, paying solicitation fees is not prohibited by law. The Agrium circular in connection with the 2013 annual meeting stated that “Agrium may cause a soliciting dealer group to be formed, and pay customary fees for such services.” Under National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”), the Canadian requirements for an information circular provide as follows: “If the solicitation is to be made other than by mail, describe the method to be employed. If the solicitation is to be made by specially engaged employees or soliciting agents, state, (a) the parties to and material features of any contract or arrangement for the solicitation; and (b) the costs or anticipated costs thereof. State who has borne or will bear, directly or indirectly, the costs of soliciting.”

Under NI 51-102, ‘solicit’, in connection with a proxy, includes “(a) requesting a proxy whether or not the request is accompanied by or included in a form of proxy; (b) requesting a securityholder to execute or not to execute a form of proxy or to revoke a proxy; (c) sending a form of proxy or other communication to the securityholder under circumstances that to a reasonable person will likely result in the giving, withholding or revocation of a proxy; or (d) sending a form of proxy to a securityholder by management of a reporting issuer; but does not include (emphasis added) … (f) performing ministerial acts or professional services on behalf of a person or company soliciting a proxy; (g) sending, by an intermediary as defined in NI 54-101, of the documents referred to in NI 54-101….” (NI 54-101 means National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer.)

Agrium’s counsel noted that 79% of Agrium’s shareholders were objecting beneficial owners, or OBOs, and that the soliciting dealer arrangements enabled Agrium to access the OBOs through brokers and investment advisors. Presumably, the soliciting dealers were relying on the permitted activities in (f) or (g) of the definition of ‘solicit’ in NI 51-102 to communicate with the OBOs and facilitate the voting of shares at the Agrium shareholders meeting. 

Jana noted that while broker compensation arrangements had been employed in Canada in solicitations for shareholder approval of mergers or other transactions that had been approved by a board, which is not conflicted, it was inappropriate for a self-interested board to use company funds to influence the outcome of its own election. Jana also noted that unlike proxy solicitors, who publicly identify themselves as soliciting for the incumbent or shareholder nominees, brokers and investment advisors would be presumed by clients to be acting in their best interests in making vote recommendations, rather than being motivated by receiving a fee. Implicit in Jana’s argument is the view that the brokers and investment advisors would be inappropriately motivated by the cash payments that were payable only if the Agrium nominees were elected.

Agrium was entitled to pay soliciting dealers for their services. If such an arrangement with the soliciting dealers group had been entered into at the time of Agrium’s proxy circular, it would have been appropriate to set out the details of those arrangements in the proxy circular. If the arrangements were described in Agrium’s proxy circular in detail, all shareholders of Agrium would have been aware of the circumstances in which the soliciting dealers were getting paid and thereby could draw their own conclusions if they were solicited by their brokers or investment advisors in connection with Agrium’s annual meeting. Disclosure of such soliciting dealer arrangements, however, may not be sufficient to change the perception of certain interested parties that paying soliciting dealers a success fee should not be permitted.

In an article in The Globe and Mail on July 5, 2013, Stephen Erlichman, the Executive Director of the Canadian Coalition for Good Governance (“CCGG”), noted that even if Agrium’s payments to soliciting dealers are not unlawful, they do not pass the “smell test” of what constitutes good governance.

As this practice of paying soliciting dealers a success fee, or ‘vote buying’, is now on the radar screen of watchdog organizations such as the CCGG[1] as well as our regulatory authorities, we have most certainly not heard the last of this issue.

Hellen Siwanowicz is a Partner at McMillan LLP.