In two recent decisions, securities regulators in British Columbia and Alberta have dismissed allegations of undisclosed joint actorship made against activist shareholders dissatisfied with management and seeking board change. These decisions establish a high threshold that will be required to prove that shareholders are acting jointly or in concert in soliciting proxies or otherwise advancing a dissident slate and required to make disclosure of their relationship and plans, and they indicate the limited remedies appropriate where such allegations are proven.

The outcomes in these cases demonstrate that efforts to constrain shareholder communications should be viewed critically. The clear message from the regulators is that shareholders should be encouraged to discuss their concerns with management, share ideas for board change, including possible nominees for a dissident slate, and hold management and the board to account. Allegations of undisclosed joint actorship will generally be viewed as a tactic to protect or entrench a board, quell shareholder activism, or silence dissident shareholders. Where an undisclosed joint actor relationship is made out, absent proof of extraordinary harm to shareholders' interests, the remedy for the non-compliance will generally be disclosure to rectify any imbalance in information available to shareholders.

What you need to know

  • The bar for a finding that parties are acting jointly or in concert is a high one, requiring parties to have "actively worked together" to achieve a "joint specific purpose". In the context of a proxy fight, a joint actor relationship involves a "common specific purpose" or a "mutual understanding" about how each of the joint actors would vote the shares they each respectively own.
    • Close personal or business relationships, alignment of interests, participation in the same events and meetings where business plans, concerns with an issuer's direction and management and/or the board's decision-making or performance, and even ideas for a dissident slate are discussed will not, on their own, meet the high bar required for a finding that parties are acting jointly or in concert.
    • The fact that two shareholders purchase or sell securities of an issuer at the same time does not, without something more, such as an agreement to purchase, hold, or sell their securities for a particular purpose, create a joint actor relationship.
  • If parties are found to be acting jointly or in concert, the early warning disclosure requirements will only be triggered on a subsequent acquisition by a joint actor (and do not automatically arise if the group is formed at a time when the group collectively holds 10% or more of the outstanding securities (but no group member individually holds 10%)). This is so even though it may leave some joint action outside the scope of the early warning requirements.
  • Where parties have failed to disclose a joint actor relationship, the appropriate remedy must be designed to protect investors and maintain fair and efficient capital markets. Public interest remedial orders must be preventative and prospective, not punitive or remedial. As a result, unless the shareholder has otherwise agreed to contractual restrictions such as those contained in standstill or voting agreements, remedies that seek to disenfranchise the shareholder or interfere with their fundamental shareholder rights, such as the right to vote and elect directors, are not appropriate where corrective disclosure could remedy any potential harm.
  • A joint actor relationship must be proved by the party making the allegation with "clear and cogent, and not ambiguous or speculative" evidence.

In British Columbia: NorthWest Copper Corp.(Re)

In reasons released at the end of last month1, the British Columbia Securities Commission dismissed an application by NorthWest Copper (NWST) in the context of a proxy fight alleging that a number of shareholders had failed to abide by the early warning disclosure requirements contained in NI 62-104 Take-Over Bids and Issuer Bids (NI 62-104) and NI 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103). The shareholders, who collectively owned more than 10% of NWST's outstanding securities, had discussed a dissident slate to be nominated at NWST's upcoming annual general meeting (AGM). One of the shareholders announced the intention to nominate the dissident slate without disclosing any joint actor relationship, notwithstanding that another shareholder was providing financial support for the proxy solicitation in favour of the dissident slate. NWST alleged that the shareholders were acting jointly or in concert in connection with the proposed dissident slate and that their failure to disclose their plans ought to result in orders from the Commission prohibiting the shareholders from exercising voting rights at the upcoming AGM, requiring the shareholders to cease trading in NWST's shares for six months, and directing compliance with the early warning rules.

Background

In May 2023, NWST called for an AGM. Sawiak, a shareholder, delivered a notice to NWST and issued a press release about his plan to nominate a dissident slate at the AGM. The notice specifically stated that Sawiak was "not acting jointly or in concert with any other person or company in connection with the foregoing".

Within 10 days of receiving Sawiak's notice, NWST announced a postponement of the AGM. NWST also sent a letter to Sawiak's legal counsel, alleging that Sawiak had been acting jointly or in concert with two other shareholders, Ianno and Kimmel, and requiring disclosure of said joint actorship.

After NWST filed a notice postponing the AGM, Sawiak delivered a second notice on nominating a dissident slate. In this notice, Sawiak disclosed that Kimmel will bear the cost of solicitation, and that "except as disclosed...the nominating shareholder is not acting jointly or in concert with any other person or company".

Within a week of receiving Sawiak's second notice, NWST again postponed the AGM to a later date and again wrote to Sawiak to require disclosure of joint actorship.

In August 2023, NWST complained to the British Columbia Securities Commission that Sawiak, Ianno, and Kimmel had acted jointly or in concert, and that they failed to comply with the early warning disclosure requirement when they together held more than 10% of the outstanding NWST shares. Accordingly, NWST asked the Commission to require the shareholders to make proper disclosure, prohibit them from voting on the election of directors at the AGM, and require they cease trading in NWST's shares for six months.

The Commission's decision

The Commission found no joint actorship and, accordingly, held that the early warning disclosure requirements did not apply. In reaching its decision, the Commission clarified that the early warning disclosure requirements do apply to proxy solicitation for the purpose of voting on an alternate slate of directors, even in the absence of a take-over bid or issuer bid2. However, if parties are found to be acting jointly or in concert, the early warning disclosure requirements will only be triggered on a subsequent acquisition by a joint actor—and do not automatically arise if the group is formed at a time when the group collectively holds 10% or more of the outstanding securities (but no group member individually holds 10%). This is so even though it may leave some joint action outside the scope of the early warning requirements.

The Commission also confirmed that the bar for finding joint actorship is "appropriately set relatively high", and that NWST failed to meet the onus in proving joint actorship. Discussions amongst the respondent shareholders about NWST's board and management and the dissident slate being proposed "[did] not constitute a plan of action or a commitment to pursue it". Further, the shareholders did not share "a common specific purpose...that extended to any form of mutual understanding", where one shareholder's aim with regards to the AGM and election was evolving while another shareholder's goal had remained unchanged throughout the process. Shareholders are permitted to act in their own self-interest and explore ways to obtain their own board representation, including through discussions with management, other shareholders, and even by offering to contribute financially to another shareholder's efforts to solicit proxies for a dissident slate. A simple alignment of interest against management and in favour of board change is insufficient to prove joint actorship.

Although a ruling on the appropriate remedy was not required in the circumstances, the Commission went on to explain that even if a finding on joint actorship had been made, it would have not imposed the extraordinary "draconian" remedy sought by NWST. The Commission observed that public interest orders under securities law should be "preventative and prospective, not punitive or remedial, and must be proportionate to the circumstances of the case and the objective of such orders: to protect investors from unfair, improper or fraudulent practices and maintain fair and efficient capital markets". That NWST sought to disenfranchise shareholders, without any evidence of harm, according to the Commission was "unsupported by and out of step with Canadian authorities"3.

In Alberta: Re DIRTT Environmental Solutions Ltd.

In a March 2023 decision4, the Alberta Securities Commission dismissed an application by DIRTT Environmental Solutions Ltd. (DIRTT) alleging, in part, that the respondent shareholders, known as the 22NW Group and the 726 Group, had "been acting jointly or in concert in a coordinated strategy to acquire [DIRTT shares], to influence or change decisions of the management and [DIRTT Board] and, ultimately, to gain control of [the DIRTT Board]". Based on the joint actorship allegation, DIRTT alleged that the respondents failed to comply with the take-over bid requirements, insider reporting disclosure requirements, prospectus requirements, and early warning and alternative monthly reporting requirements.

Background

The 726 Group started investing in DIRTT in 2018. It increased its shareholding and crossed the 10% early warning threshold in November 2020. In 2020, the 22NW Group also started investing in DIRTT. It continued to increase its shareholding and crossed the 10% threshold in June 2021.

In August 2021, a significant DIRTT shareholder put a block of shares up for sale. The 22NW Group and the 726 Group both bought shares from this shareholder. Afterwards, an individual from the 22NW Group began having conversations with DIRTT that he was interested in joining the Board.

In November, DIRTT released its third-quarter financial results. Subsequently, the 22NW Group and the 726 Group expressed similar concerns and frustration to DIRTT's management on separate occasions. Around that time, DIRTT was considering a financing transaction in which neither the 22NW Group nor the 726 Group ultimately participated.

Also in November, the individual in the 22NW Group interested in joining the Board learned that he would not be appointed as a director. As a result, he stated his intention to requisition a shareholders' meeting. A concern about entrenchment by the DIRTT board motivated the decision to seek the replacement of the board.

The 726 Group heard about "rumblings" from a third party who did not identify the 22NW Group. Then, the 726 Group informed DIRTT about its position that management should not allow "rumblings" to cause public disruptions. DIRTT took this as a reference to the requisition, which was not public at the time.

Less than a month after the requisition, DIRTT announced a shareholders' meeting for April 2022, its adoption of a shareholder rights plan, and its concerns about certain shareholders acting jointly or in concert with the 22NW Group. Subsequently, DIRTT informed the Commission's staff about its investigation of the 22NW Group and the 726 Group's joint actorship and filed for an application. Among other things, DIRTT sought an order to restrain the respondents' vote to 19.9% of the issued and outstanding shares and to prevent the respondents from trading the shares at issue until they make compliant public disclosure.

The Commission's decision

The Commission found that DIRTT failed to meet the onus to provide clear and cogent evidence of joint actorship. According to the Commission, DIRTT's evidence was "ambiguous and speculative", and rather than supporting a finding of joint actorship, the evidence supported that the respondents acted independently in their own self-interest. For example, the evidence showed that the respondents conducted their own investigation and analysis about investing in DIRTT. That those investigations ultimately ended with investments being made in and around the same time did not establish joint actorship. It was reasonable that the respondents wanted to take advantage of the market and were approached at the same time when investment opportunities became available.

The fact that the respondents held some of the same securities at the same time, increased their investments in DIRTT at the same time, participated in some of the same teleconferences, calls, and meetings, and, ultimately, decided to both support a requisition seeking a shareholders meeting where board change would be sought did not amount to a joint actor relationship. Having their interests aligned on these issues did not mean they were acting jointly or in concert either.

Footnotes

1. NorthWest Copper Corp. (Re), 2023 BCSECCOM 602.

2. The Commission expressly encouraged the Canadian Securities Administrator to make the language clearer in NI 62-103 and NI 62-104 on this point.

3. Consistently, courts have exercised caution when ordering remedies where undisclosed joint actorship was proven. For example, in Genesis Land Development Corp. v Smoothwater Capital Corporation, 2013 ABQB 509, the Alberta Queen's Bench refused to grant remedy that would disenfranchise shareholders, observing that remedies should be "a scalpel, and not a battle axe". Similarly, the Ontario Superior Court commented in Continental v. Singh, 2012 ONSC 7122 that even if it had found joint actorship and a breach of early warning disclosure requirements, it would not have interfered with a shareholder's right to vote.

4. Re DIRTT Environmental Solutions Ltd., 2023 ABASC 32.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.