In NorthWest Copper Corp., 2023 BCSECCOM a Hearing Panel of the British Columbia Securities Commission was asked to make orders under section 114 of the B.C. Securities Act, RSBC 1996, c. 418 (the Act) to prohibit the trading and voting of securities by three individual respondents arising from their alleged failure to comply with the early warning disclosure requirements in NI 62-104 – Take-Over Bids and Issuer Bids and NI 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues following the announcement by one of the respondents of his intention to nominate a slate of directors different from the slate proposed by management at the company's upcoming annual general meeting (AGM) of shareholders. NorthWest alleged that the three respondent shareholders were acting jointly and in concert for the purpose of bringing about the installation of a dissident slate of directors.
The decision is noteworthy for its determination of the following issues:
Acting "Jointly and in Concert" May Trigger Early Warning Requirements in Situations Not Involving a Take-over or Issuer Bid
While addressed by the Alberta Court of Queen's Bench in Genesis Land Development Corp. v. Smoothwater Capital Corporation, 2013 ABQB 509, this is the first time that a Canadian securities regulator has been asked to determine whether joint actors may trigger the early warning requirements in a proxy solicitation contest even in the absence of a take-over or issuer bid. The decision in Northwest is consistent with Genesis. Applying a broad and liberal interpretation of the relevant national instruments and section 98 of the Act, the Hearing Panel confirmed that the concept of acting "jointly and in concert" extends to proxy solicitations for the purpose of voting on an alternative slate of directors even where there is no take-over or issuer bid. The Hearing Panel encouraged the CSA to make that clearer in the language of the relevant provisions.
The Early Warning Disclosure Obligation is Only Triggered Where an Acquisition Results in Joint Ownership or Control of at Least 10%
The decision also clarifies that the early warning disclosure obligation in section 5.2 of NI 62-104 is only triggered when parties who are acting jointly and in concert acquire securities which increases their joint ownership or control to at least 10% of the outstanding securities of that class. Shareholders collectively owning or controlling securities reaching the 10% threshold do not have a disclosure obligation at the time that they commence acting jointly and in concert. An acquisition is the disclosure trigger.
"Clear, Convincing and Cogent Evidence" is Required to Establish that Shareholders are Acting Jointly and in Concert
The decision further confirms that "clear, convincing and cogent evidence" is required to establish that shareholders are acting jointly and in concert. The Hearing Panel recognized that while disclosure of shareholder blocks is important, "so is the free flow of information and opinion among shareholders of a public company." On balance, even if the application of the "relatively high" standard of proof means that "some groups will fly under the radar", that is preferable to allowing "reliance upon speculation to create a climate that stifles discussion among shareholders."
Determining Whether Shareholders are Acting "Jointly and in Concert" Requires Scrutiny of Shareholder Motivation
Finally, in determining whether shareholders are acting "jointly and in concert," the specific motivation of each of those shareholders will be carefully scrutinized. A simple alignment of interest is not sufficient. Actively working together to achieve a particular joint purpose is required. In NorthWest, one of the three respondent shareholders (Kimmel) alleged to have been acting jointly with the others for the purpose of bringing about the installation of a dissident slate of directors was found not to have had that purpose. While Kimmel had agreed to finance the proxy solicitation efforts undertaken by one of the other respondents, Kimmel was not actively involved in the planning or preparation of the solicitation. The Hearing Panel accepted Kimmel's evidence that he was simply interested in keeping his options open. The mere fact that the respondents had discussed their concerns about the company's board and management did not constitute "a plan of action or a commitment to pursue it." As such, NorthWest failed to demonstrate on a balance of probabilities that the respondents "actively worked together to achieve a joint specific purpose, and were not simply aligned in interest."
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