On September 10, 2013, the Alberta Court of Queen’s Bench released its reasons for judgment in Genesis Land Development Corp. v. Smoothwater Capital Corporation, 2013 ABQB 509 (“Genesis”).
In August 2013, Genesis Land Development Corp. (“Genesis”) had applied for an order disentitling a group of activist shareholders, led by Smoothwater Capital Corporation (“Smoothwater Group”), from voting their shares at the Genesis Annual General Meeting (“AGM”). Genesis alleged that the Smoothwater Group had failed to disclose their common intentions to gain control of the Genesis board to the market, and that the Smoothwater Group had therefore breached the disclosure provisions contained in Multilateral Instrument 62-104, Take-Over Bids and Issuer Bids (“MI 62-104”). Conversely, the Smoothwater Group maintained that the notion of “jointly and in concert” was only applicable in the context of a take-over bid, and that disclosure obligations under MI 62-104 were not triggered as there was no take-over bid in play.
The court sided with Genesis and found that the Smoothwater Group was acting “jointly and in concert” to attempt to replace the Genesis board of directors with a slate of directors of their own choosing, and that they had indeed contravened their disclosure obligations under the securities regulatory regime by failing to disclose this common intention to the market. The court adjourned the Genesis AGM for one month to allow for proper disclosure and proxy solicitation “in the context of full disclosure.”
In its ruling, the court considered four issues: i) whether or not a shareholder block had an obligation to disclose that they were acting “jointly and in concert” in the context of a proxy fight; ii) whether or not the Smoothwater Group was indeed acting “jointly and in concert”; iii) if so, if the Smoothwater Group had made appropriate disclosure that they were acting “jointly and in concert”; and, iv) if disclosure obligations were not met, the appropriate remedy for failing to make such disclosure.
The court’s consideration of the first issue—the obligation to disclose—is of particular interest. In considering whether the Smoothwater Group had an obligation to disclose that it was acting “jointly and in concert” in the context of a proxy fight, the court pointed to the applicable securities instrument—Part 5 of MI 62-104, entitled Reports and Announcements of Acquisitions—noting the instrument “specifically applies to persons who acquire shares other than by way of a take-over bid or issuer bid,” and that it mandates early disclosure if an acquiror acquires beneficial ownership of or control or direction over securities of a reporting issuer that would constitute 10% or more of the outstanding securities of that class. The early warning system of MI 62-104 requires that an acquiror comply with section 3.1 of National Instrument 62-103, The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (“NI 62-103”), by filing and issuing a news release and filing the requisite report.
The court then considered the policy rationale underlying the “early warning system”, pointing to the Notice of National Instrument 62-103 (September 4, 1998). It noted “early warning” disclosure is rooted in the materiality of information related to significant acquisitions. Significant acquisitions are potentially material to the market and investors even if they do not constitute a change of control.
While the court based its decision on existing law and policy, it did take notice of the Canadian Securities Administrators’ staff notice of March 2013 pertaining to proposed amendments to NI 62-103, which reconfirmed that “the objective of early warning disclosure is not only to predict possible take-over bids but also to anticipate proxy-related matters.” The notice reiterated that the purpose of the “early warning system” is to compel disclosure of information to investors and the market related to changes in share ownership and control, and the rationale for such disclosure is to maintain market transparency and investor confidence.
The court thus rejected the Smoothwater Group’s contention that MI 62-104 could only apply to an “offeror” of securities—i.e., in the take-over bid context—noting that such narrow interpretation was not in line with the broad and remedial interpretation to be given to securities legislation. It also noted that the language in the instrument was not limited to the context of an agreement to acquire shares, as MI 62-104 is applicable in the context of any “agreement, commitment, or understanding” to exercise voting rights attached to shares. The court then held that the early warning requirements in NI 62-103 apply not only to offerors in the take-over bid context, but more generally, to all “joint actors,” for purposes beyond a formal bid. Accordingly, the court confirmed the “early warning system” applies in the context of a proxy fight.
The court went on to apply this rationale to the facts before it, holding that the Smoothwater Group was acting “jointly and in concert”, that they had not made appropriate disclosure of this fact, and that the appropriate remedy for a breach of MI 62-104 was a remedial order under section 180 of the Securities Act (Alberta), delaying the AGM until it could be held in the context of full disclosure.
The Genesis decision has important implications for all market actors. For shareholders, the decision reinforces the importance of complying with disclosure obligations in the context of a proxy fight and other similar scenarios, and even if a formal take-over bid is not contemplated by a shareholder group. For issuers, and the broader market, the decision confirms that early disclosure of shareholders’ joint intentions is to be expected; issuers and investors can anticipate that they will have access to such information, and an opportunity to respond accordingly. For the regulatory scheme as a whole, Genesis confirms the continued validity of the information-based policy rationale underlying the disclosure regime.