Canadian regulators take aim at ‘vote buying’ in proxy battles

Canadian securities regulators are vowing to take a hard look at whether companies should be allowed to pay fees to investment dealers for securing favourable shareholder votes in proxy contests and other corporate transactions.

It is a move some industry watchers consider to be long overdue.

The practice was dubbed “vote buying ” by the Canadian Coalition for Good Governance nearly five years ago when the controversial fees were paid to dealers if their clients voted in favour of re-electing the directors of Agrium Inc. who, at the time, were facing a rival board slate put forward by hedge fund investor Jana Partners. If Agrium’s slate of directors won, dealers stood to earn 25 cents for each share voted in favour of the Agrium nominees, from a minimum of $100 to a cap of $1,500 per client.

“As the CCGG has said before, we believe vote-buying in the context of proxy contests is unethical and should not be permitted,” said Stephen Erlichman, executive director of the governance coalition backed by many of the country’s largest pension funds and money managers.

Canadian regulators were silent on this issue after the Agrium affair, despite sharp criticism from institutional shareholders and corporate governance advocates, who noted that the practice does not exist in other regulated jurisdictions such as the U.S.

But this month, regulators across the country pledged to look at the practice under the umbrella of the Canadian Securities Administrators, and to determine whether new rules or guidance are needed to govern all soliciting dealer arrangements, not just those related to proxy battles. The CSA’s assessment will also include probing whether fees paid under soliciting dealer arrangements puts investment dealers in a conflict of interest over what’s best for themselves and what’s in the best interest of their clients. Such arrangements can be used to solicit securities to vote in connection with any matter requiring shareholder approval, or to tender to a takeover bid.

“The practice of soliciting dealer arrangements raises certain securities regulatory issues, notably around conflicts of interest and the integrity of the voting and tendering process,” Louis Morisset, chair of the CSA and chief executive of Quebec’s Autorité des marchés financiers, said in statement. “In light of these issues, we believe it is appropriate to assess how these arrangements are being used and whether further regulatory action is appropriate.”

Industry watchers suggest regulators didn’t intervene earlier because they expected the controversy to reduce the urge to use fee-paying arrangements to secure votes. “’After the fallout from the Agrium proxy contest, it was expected that the practice of paying soliciting dealers to secure votes ‘for’ management nominees in contested director elections would be abandoned,” lawyers at Toronto-based law firm Davies Ward Phillips & Vineberg LLP wrote in a recent note to clients.

But last year, the issue resurfaced in a proxy contest between Liquor Stores N.A. Ltd. and PointNorth Capital Inc. PointNorth complained to the Alberta Securities Commission, which didn’t intervene because, as the Davies lawyers explain, “soliciting dealer arrangements were not explicitly prohibited under applicable laws.” It was also not found to be clearly abusive to the capital markets.

Still, a lawyer at another firm predicted that regulators could move to address the issue on the policy

The practice (raises) ... issues, notably around conflicts of interest and the integrity of the voting and tendering process.

front. “The PointNorth decision is unlikely to be the final chapter on this subject,” Neill May, a partner at Goodmans LLP, wrote in a note to clients. “Reasons include the widespread use and controversial nature of these arrangements, the potential for a different result if the complainant can lead to evidence of harm and the fact that the ASC did not express a broad perspective on the practice.”

Among the points left open to debate is whether the use of a soliciting dealer arrangement in a proxy contest goes against the fiduciary duties of directors, or is oppressive to shareholders, wrote May.

“In contested director elections it raises probably the biggest question,” said Jeremy Fraiberg, a partner and co-chair of the mergers and acquisitions group at law firm Osler, Hoskin & Harcourt LLP. “The directors are conflicted and are using corporate assets to pay brokers for votes in favour of the incumbent board.”

Critics say directors should not be put in a position in which they can decide to use company money to pay fees to dealers who get votes that help those same directors maintain their positions — thus entrenching themselves — at the firm.

The CSA will be accepting feedback on its consideration of intervention in soliciting dealer arrangements until June 11.