Regulators following through on pledge

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 United States.

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 chief executive of Quebec’s Autorité des marchés financiers, said in statement announcing the review. “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.

However, last year, the issue arose again in a proxy contest involving Liquor Stores N.A. Ltd. and Point- Canadian regulators were silent on what is known as the Agrium affair on vote buying. North Capital Inc.

PointNorth complained to the Alberta Securities Commission, which declined to intervene because, as the Davies lawyers explain, “soliciting dealer arrangements were not explicitly prohibited under applicable laws.” In addition, the practice was not found to be clearly abusive to the capital markets.

Nevertheless, after that decision last fall, a lawyer at another firm predicted that regulators could move to address the issue on the policy 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, who is co-chair of the corporate securities group at Goodmans.

“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 — thereby entrenching themselves — at the company.

The CSA will be accepting feedback on its consideration of intervention in soliciting dealer arrangements until June 11. Among the questions asked so far, regulators want to know typical circumstances in which the feepaying arrangement are used and why, as well as views on the “appropriateness” of using them to get votes cast in favour of management’s recommendations.

The watchdogs also want to know whether investment dealers’ potential conflicts of interest can be “effectively managed” with these arrangements.

The heightened focus on soliciting dealer arrangements is one reason some market watchers expect them to be used sparingly, but there are other disincentives when it comes to using them in proxy battles, “regardless of any regulatory initiatives,” said Bill Maslechko, a partner at law firm Burnet, Duckworth & Palmer LLP.

“Perhaps most significantly is that they are not viewed favourably by institutional investors or proxy advisory firms,” he said. “Since institutional shareholders make up a significant percentage of most public companies’ shareholder base and as a rule they all vote, it is a rare company that will have a large enough retail shareholder base that it might make sense to consider the use of a soliciting dealer arrangement in a proxy contest.””