End nears for SDAs in proxy fights
In a week or so, the Canadian Securities Administrators is expected to make public the submissions it received for comments it sought on soliciting dealer arrangements (SDAs).
The CSA requested the comments on April 12 as a result of “certain issues” staff identified with their use and wondered whether “any additional guidance or rules in respect of those arrangements would be appropriate.”
One of those issues was the early summer 2017 proxy battle at Alberta-based Liquor Stores NA Ltd. in which the target offered to pay brokers (whose clients own the shares) to support its slate.
But the payments to the brokers would only be made if the company-sponsored slate was successful and the broker voted yes.
For some observers that plan was akin to the line uttered by Samuel Johnson: Patriotism is the last refuge of the scoundrel.
Given that the target was losing the battle for shareholder support, the idea was that a different outcome would result if Liquor Stores incentivized the brokers to support the home team.
(That incentive didn’t work: prior to the meeting, six of the issuer’s nominees stepped down and were replaced by six from the dissident’s team.)
SDAs are sometimes used in less-controversial situations including regular take-over bids and plan of arrangements. One report said they’ve been used in 40 such situations over the past 15 years.
The CSA said SDAs are used because “it may be difficult” for issuers to reach objecting beneficial owners. (Issuers can reach all shareholders if they use the services of Canada Post.)
The CSA said such arrangements “raise certain securities regulatory issues,” including whether the integrity of the tendering process or the security-holder vote has been affected. But the CSA said that under IIROC’s rules SDAs don’t create a fiduciary standard — though conflicts must be avoided if they can’t be addressed in a “fair, equitable and transparent manner.”
Kingsdale Advisors, the country’s largest proxy solicitation firm, said SDAs should be banned in proxy contests, a decision that would bring Canada into line with the U.S.
“The only way to ensure the integrity of a shareholder voting system that presently lacks transparency is to ban soliciting dealer arrangements within the context of proxy fights in their entirety,” said Wes Hall, Kingsdale’s executive chairman. The firm has been involved in all three such “vote buying” examples. (Enercare and Agrium are the other two.)
Hall added SDAs are not used “for the altruistic purpose of increasing shareholder participation in a democratic process, they are used as an entrenchment tactic for directors under fire.”
Hall noted the brokerclient relationship is “based on trust and that trust should not be manipulated by offering skewed incentives.”
Amy Freedman, Kingsdale’s chief executive, reinforced the firm’s policy stance by noting when brokers are paid fees to secure a result “the potential for conflicts of interest, board entrenchment, and exploitation of the integrity of the proxy voting process exists.”
Accordingly, Freedman said given “the conflicted position” the issuer initiating the arrangement is in, “the requirements that could make soliciting dealer arrangements permissible are unachievable in practical terms.” SDAs seem to make it impossible to achieve neutrality in a proxy fight.
For M&A transactions, Freedman said, “it’s more socially acceptable” to incorporate SDAs, in part because it may help solve the core problem: how do issuers get in touch with all shareholders some of whom chose to disguise their ownership.
In 2017, the Alberta Securities Commission was asked to intervene. But it declined to exercise its public interest jurisdiction, in part because the practice doesn’t violate securities laws.
Now it’s over to the CSA and here’s a prediction: it will 100-per-cent side with the public interest argument and ban them.