CSA considering investor concerns expressed on Dealer Solicitation Fees

Canadian Securities Administrators (CSA) are taking a closer look at the use of soliciting dealer arrangements by corporate issuers, in proxy fights and other corporate transactions. CSA Staff Notice 61-303 asked market participants for their feedback, to better understand these arrangements in assessing whether any additional guidance or rules in respect of those arrangements would be appropriate.

Understandably, most of the comment letters that have been published over the last few weeks in response to the CSA’s request are from investors or investor groups, concerned with the potential for conflicts of interest that could arise in tying solicitor fees with the outcome of the vote. While soliciting dealer arrangements are not new, they have been utilized by issuers for decades with little controversary. What has changed over the last 6 years is the sporadic use by issuers in proxy contests. The attention and discussion has intensified with each of the three proxy contest that have occurred, where management has utilized a dealer solicitation group. The first proxy contest that management utilized a dealer solicitation fee arrangement was in 2012, Enercare Inc. vs. Octavian Advisors. This was followed in 2013 with Agrium Inc. vs Jana Partners LLC’s. Management was successful in both contests. The latest proxy contest to utilize solicitation fees, was PointNorth Capital Inc.’s successful board challenge in 2017 of Liquor Store N.A. Ltd.

The use of dealer solicitation arrangements by corporate issuers has been justified historically as a method to compensate dealers/brokers for the time and expense of contacting their clients regarding a takeover bid. Over time their use expanded to include plan of arrangements and then most recently for proxy contests. Usually, the decision was made to incorporate these arrangements into the solicitation because there was a significant portion of the issued and outstanding shares held by a retail shareholder base, that issuers were unable to identify and could not communicate directly with them. The hope was that in compensating investment advisors to reach out to their clients, the retail shareholder would be engaged and participate in the vote or tender offer. The controversy around the practice stems from a typical condition in the arrangement that the fees are only paid for favourable votes or tenders and only if the transactions or vote is approved.

It is not uncommon in a proxy contest, tender offer or plan of arrangement for management to use company resources to increase shareholder participation and gain support by hiring advisors to assist in communicating with shareholders to further management’s desired outcome. The dealer solicitation arrangement is different for two reasons, firstly the investment advisor will have an existing relationship with the investor and therefore have a stronger influence towards the investors decision. Secondly, most arrangements tie compensation to the outcome of the vote, increasing the incentive for recommending with management. The arrangements can create an advantage for management as well as a potential perceived conflict for an investment advisor.

There are some benefits to shareholders that are often overlooked in these discussions. Retail shareholders may not be aware of a major corporate event for their investment and any additional contact to them to bring awareness will be beneficial and will increase the likelihood of a missed opportunity to participate.

To understand why an issuer can hire advisors to help communicate to some shareholders and not others, you would need to understand the Canadian voting system. A shareholder base can be broken down into retail and Institutional shareholders.

Retail investors are often unaware that the choices they make when they set up their brokerage account will affect if and how they receive communication from an issuer. For an issuer, the way a retail investor has set up their brokerage account will have a significant impact on whether or not an issuer can reach their shareholders. One of the most significant options for an issuer to be able to reach their shareholders, depends on their selection of NOBO/OBO option. Shareholders have the option of being NOBO (non-objecting beneficial holders) which allows an issuer to have knowledge of the shareholder position, shareholder name and address, and occasionally email address. The other portion of retail investors are OBO holders, (objecting beneficial holders). The issuer does not have any information on these shareholders and thus have no way to contact the holder other than by mailing material through third parties. Retail investor participation without additional engagement can be low and consequently the outcome of the vote can often be determined mostly by a few large holders.

Reading the comment letters submitted to the CSA, the major concern expressed is tying the payment of fees to investment advisors for votes received that are favourable to management. It will be interesting to see if the CSA will prevent the tying of fees to the outcome in the future and if issuers will still utilize dealer solicitation fees to bring awareness to the shareholders they cannot reach.