This post was contributed by Walied Soliman, Partner, Norton Rose Canada, and Evelyn Li, Associate, Norton Rose Canada
A scan of recent business headlines suggests shareholder activism continues to rise, and even the who’s who of deep-rooted Canadian businesses are not immune.
While preparing for the upcoming proxy season, whether or not your company is at risk for a proxy contest, it might be a good idea to consider adopting certain pre-emptive defensive tactics, including a by-law to provide advance notice for nomination of directors as recently proposed by Arius3D Corp.
Dissidents in a proxy contest typically look to gain board control by replacing directors with nominees whose strategy reflects that of the dissidents. Dissidents can propose their own nominees by:
- requisitioning a meeting of shareholders to remove incumbent directors and elect the dissidents’ nominees;
- preparing a shareholder proposal to the company within the prescribed timeline before a shareholders’ meeting, for inclusion in the management information circular;
- soliciting proxies for the dissidents’ nominees before a meeting of shareholders; or
- ambushing from the floor (i.e., during the motion to elect management’s nominees as directors) at a meeting of shareholders.
For your company, an ambush is the worst-case scenario as you would have no advance warning and no chance to prepare a defence. Other shareholders and proxyholders (i.e., the non-dissidents) would also learn of the dissidents’ proposal and nominees at the time of the ambush, just before voting for the election of directors.
At a recent shareholders’ meeting, Arius shareholders were asked to consider a resolution approving an amendment to its by-laws to add a provision requiring advance notice for nomination of directors.
Basically, the amendment limits dissidents’ ability to propose their nominees for directors to a written shareholder proposal, including the names and certain other information about the dissidents’ nominees that would require disclosure in a dissidents’ proxy circular. This would be submitted to the company not less than 30 days and not more than 65 days before a meeting of shareholders.
Arius’ rationale for the amendment is to ensure all shareholders receive adequate notice of the nominations in order to exercise their voting rights in an informed manner, as well as to help facilitate an orderly and efficient meeting.
Though it recommended an “against” vote for other reasons, Institutional Shareholder Services (ISS) supported the by-law amendment’s spirit, as the amendment “provides a clear process for shareholders to follow to nominate directors and sets out a reasonable time frame for nominee submissions along with a requirement for relevant accompanying information, and is therefore supportable.”
We agree with this view and believe ISS would support adopting a by-law requiring advance notice for nomination of directors, provided it is clear, fair and reasonable and the full by-laws of the company are available to the shareholders.
Such a by-law would help facilitate an informed decision-making process for electing directors. It’s also consistent with the general governance principal of ensuring shareholders have sufficient information and opportunity to make informed decisions. Accordingly, adopting a by-law requiring advance notice for nomination of directors would be an effective pre-emptive defensive tactic against a dissidents’ ambush.