Overview and Key Takeaways

Proxy contests for control of an issuer's board necessarily involve soliciting shareholder support for the dissident's slate of directors and often involve discussions among shareholders who have similar or overlapping objectives in mind. But when do these discussions amount to a group of shareholders acting "jointly or in concert" with each other? The issue matters because, amongst other things, becoming "joint actors" can lead to public disclosure obligations under the early warning requirements (EWR) of securities legislation.1

The British Columbia Securities Commission recently examined this issue in NorthWest Copper Corp. (Re).2 Our key takeaways are:

  • The Commission held that the "bar for a finding that parties are acting jointly or in concert is appropriately set relatively high..."
  • The Commission's rationale for this arduous standard was policy-based. While it acknowledged that "disclosure of shareholder blocks is important," so too is the "free flow of information and opinion among shareholders of a public company." The Commission therefore concluded 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."
  • The Commission was prepared to infer from circumstantial evidence that an informal understanding existed among the alleged joint actors to vote their shares in concert in support of the dissident slate. However, it would do so "cautiously". It would also "balance the strength of the circumstantial evidence against the reasonableness of other explanations that might explain the same circumstance."
  • On the facts before it, the Commission was not prepared to find the parties were acting jointly, despite the fact that the key alleged joint actor, Kimmel, had both (1) nominated a director on the dissident's alternate slate, and (2) funded the majority of the dissident's proxy solicitation campaign. While these facts demanded a "skeptical review" of Kimmel's explanations, they were offset by (A) his lack of direct involvement in the "planning and preparation" of the dissident campaign, and (B) his simultaneous negotiations with the company to support its slate in exchange for a nominee director on the slate.
  • What was required was evidence that the alleged joint actors "actively worked together to achieve a joint specific purpose." Simply being "aligned in interest" is inadequate.

The AGM and the Dissident Slate of Directors

NorthWest Copper Corp. (NWST) is a mining company listed on the TSX Venture Exchange (TSXV). The persons alleged by NWST to have been joint actors are Sawiak (a 0.4% shareholder), Ianno (a 3.9% shareholder) and Kimmel (a 7.9% shareholder).

The factual context giving rise to the dispute is relatively complex, and so for interests of expediency we focus only on its principal elements. Also, although there were three alleged joint actors, the "key figure" for the Commission was Kimmel as, without his 7.9% shareholding, the aggregate 10% or greater shareholding necessary for "joint actor" status could not be reached.

NWST's annual general meeting (AGM) was scheduled for June 23, 2023. On May 19, 2023, Sawiak delivered official notice (and issued a related press release) that he planned on nominating an alternate slate of directors at the AGM. The notice expressly provided that he was not acting jointly or in concert with any other shareholders.

Sawiak's alternate slate caused NWST to postpone its AGM, first until September 6, 2023 and ultimately until September 19, 2023. NWST also responded by asserting that Sawiak was acting jointly and in concert with other shareholders in connection with Sawiak's alternate slate and was obligated to disclose that fact under securities regulations. When Sawiak did not do so, NWST instituted proceedings before the Commission seeking to, inter alia, compel such disclosure and prohibit Sawiak, Ianno and Kimmel from voting their shares at the AGM.

Evidence Supporting Joint Actor Allegations

The evidence relied on by NWST focused on the relationship among Kimmel, Sawiak and Ianno, both surrounding Sawiak's dissident campaign as well as beforehand.3 Key facts supporting NWST's allegations were:

  • Ianno and Kimmel had known each other for several years prior to the events at issue.
  • Kimmel's personal company had loaned Ianno $500,000 for Ianno to put towards participating in a January 2023 private placement of securities by NWST.
  • In April 2023, Ianno and Sawiak began discussing the possibility of effecting change to NWST's board.
  • In subsequent text messages to certain third parties, Sawiak implied that decisions regarding a potential proxy battle for the company's board were being made jointly by Sawiak and Ianno.
  • Sawiak had described the dissident slate to certain third parties as being the consensus of multiple shareholders, including Ianno.
  • When Ianno approached Kimmel regarding the possibility of replacing some of NWST's directors, Kimmel expressed interest in having a representative on the board.
  • Kimmel's nominee, as communicated to Ianno, was included in the dissident slate ultimately compiled by Sawiak.
  • Kimmel agreed to fund the majority of the costs of the proxy solicitation campaign conducted by Sawiak.
  • During the dissident campaign, Kimmel and Ianno met with another NWST shareholder during which meeting, among other things, NWST had been discussed.

The crux of NWST's argument was therefore that it "defied belief" to suggest Kimmel had no intention to vote his shares in favour of the dissident slate when (1) the slate included his nominee, and (2) he funded the majority of the costs of the proxy battle for that slate. Also underlying this assertion was (1) the historic relationship between Ianno and Kimmel, and (2) the apparent coordination amongst Ianno and Sawiak regarding Sawiak's dissident campaign.

Evidence Countering Joint Actor Allegations

The evidence presented by Sawiak, Ianno and Kimmel (collectively, the Respondents) of most significance to the Commission was that relating to Kimmel and his individual motivations in the circumstances. This included:

  • Apart from choosing his representative on the dissident slate, Kimmel was not otherwise involved in compiling the slate nor had he ever met any of the other nominee directors.
  • Notwithstanding his association with Sawiak's dissident campaign, Kimmel had also been negotiating a voting support agreement with NWST whereby Kimmel would gain a nominee on NWST's board in exchange for supporting management's slate of directors.
  • NWST terminated these negotiations only upon learning that Kimmel was contributing to Sawiak's dissident campaign.
  • Kimmel had expressed concern to NWST that despite his support of management, the dissident slate might win, leaving him with a substantial share position without representation, and he sought to mitigate that risk.
  • Despite nearing agreement on the voting support agreement with NWST, Kimmel did not inform Ianno or Sawiak of his negotiations with management.
  • In his discussions with NWST, Kimmel stated he was not part of any group, but was simply protecting his own best interests.

The Commission noted that when opportunities to be represented on NWST's board arose – whether through Sawiak's alternative slate or NWST's negotiations to secure his support – Kimmel pursued those opportunities.

The Commission's Analysis

Under NI 62-104 s.1.9(1)(b)(i), persons will be presumed to be joint actors where, pursuant to an agreement, commitment or understanding between them, they intend to exercise jointly or in concert voting rights attached to securities of an issuer.4 Caselaw has elaborated that acting jointly or in concert requires that the persons have made "a concerted effort to bring about a specified objective" and that mere "alignment of interests" does not suffice.5

It was common ground that no formal agreement or commitment existed among the Respondents to jointly vote for Sawiak's dissident slate. As such, the question was whether the Commission was prepared to infer from circumstantial evidence that an informal understanding existed among the Respondents sufficient to establish they had formed a "plan of action" and "commitment to pursue it."

The Commission held that the burden was on NWST to adduce evidence that was sufficiently clear, convincing and cogent that established such an understanding among the Respondents on a balance of probabilities (i.e., whereby the understanding and "specified objective" appeared more likely than not).

The Commission made clear that it would be "cautious in drawing inferences from circumstantial evidence." Specifically, it noted that "before drawing an inference that something must be so," it would "balance the strength of the circumstantial evidence against the reasonableness of other explanations that might explain the same circumstance."

This approach proved crucial. On the one hand, the Commission acknowledged circumstantial evidence suggesting joint action to a degree that "justified a very careful and skeptical review of the Respondents' explanations." On the other hand, however, it ultimately determined that the Respondents had provided "credible and plausible alternative explanations" in response.

Key here was the Commission's finding that Kimmel was a "sophisticated" investor who was "at all times" acting "independently in his own interests without regard for the interests of others." The Commission found that, rather than having shared a "common specific purpose" with Sawiak and Ianno regarding the dissident slate, Kimmel appeared "throughout to have been solely motivated to place his own representative on the board by whatever means presented themselves."

It was plain that Kimmel had shown clear interest in Sawiak's dissident slate and had nominated a representative on that slate. However, Kimmel had also negotiated with NWST for "a totally different result," namely to support the company's slate in exchange for a representative on that board. This "undermined the argument" that Kimmel was "engaged in a common enterprise with Sawiak and Ianno." Perhaps most importantly, the Commission required further evidence that Kimmel was "himself engaged" in the "active and coordinated effort" to achieve the installation of Sawiak's dissident slate at the AGM.

As for Kimmel's financing of Sawiak's proxy solicitation campaign, the Commission described this as "not the route that would be chosen by every disaffected shareholder". However, the Commission also found credible Kimmel's explanation that he was willing to do so to "keep his options open". Importantly, the Commission found that the amount of money spent by Kimmel supporting the proxy campaign to be "of no particular consequence to him." Nor did the Commission view Kimmel's "financial contribution" as evidence that "he was involved, much less actively involved, in the planning or preparation" of Sawiak's proxy solicitation campaign.

Finally, and significantly, the Commission ruled that "the bar for a finding that parties are acting jointly or in concert is appropriately set relatively high..." Its rationale for this was policy-based, the Commission explaining as follows:

Disclosure of shareholder blocks is important, but so is the free flow of information and opinion among shareholders of a public company. 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.

The end result was that, while Kimmel may have been "aligned in interest" with Sawiak and Ianno, this alone was insufficient. What was required was evidence establishing that the three had "actively worked together to achieve a joint specific purpose," a standard NWST had failed to meet.

Footnotes

1. Note that qualifying as joint actors does not, in and of itself, trigger disclosure obligations under EWR legislation. Rather, as held by the Commission at paras. 153-158, EWR legislation will only impose a disclosure obligation upon the acquisition of securities of the issuer by one or more of the joint actors subsequent to them becoming joint actors (and that results in the joint actors collectively holding 10% or more of the issuer's securities).

2. NorthWest Copper Corp. (Re), 2023 BCSECCOM 602 (CanLII).

3. The evidence marshalled by the parties before the Commission was largely circumstantial and often involved competing accounts of the same events that required the Commission to decide which it viewed as more credible.

4. The full text of NI 62-104 s.1.9(1)(b)(i) reads: "1.9 (1) In this Instrument, it is a question of fact as to whether a person is acting jointly or in concert with an offeror or an acquiror and, without limiting the generality of the foregoing... (b) the following are presumed to be acting jointly or in concert with an offeror or an acquiror: (i) a person that, as a result of any agreement, commitment or understanding with the offeror, the acquiror or with any other person acting jointly or in concert with the offeror or the acquiror, intends to exercise jointly or in concert with the offeror, the acquiror or with any person acting jointly or in concert with the offeror or the acquiror any voting rights attaching to any securities of the offeree issuer;"

5. See NorthWest Copper Corp. (Re), 2023 BCSECCOM 602 (CanLII) at paras. 170-171 and the caselaw cited therein, being Genesis Land Development Corp. v Smoothwater Capital Corporation, 2013 ABQB 509 (CanLII), Kingsway Financial Services Inc. v. Kobex Capital Corp., 2016 BCSC 460 (CanLII), and Re DIRTT Environmental Solutions Ltd., 2023 ABASC 32 (CanLII).

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.