Guide to Shareholder Activism and Proxy Contests in Canada

There is a specific carve-out for a person considering, evaluating or proposing a takeover bid, business combination or substantial asset acquisition that allows the person to disclose MNPI in the necessary course of the discloser’s business to effect such a transaction. However, no similar statutory exception exists for disclosures made by a person proposing a board change or proxy contest. For the activist shareholder holding more than 10% of a company’s shares or is otherwise a special relationship person, the question is whether the activist’s disclosure to others of its intention to pursue a board change or proxy contest constitutes prohibited tipping. If the activist’s plans amount to a “material fact” — that is, a fact “that would reasonably be expected to have a significant effect on the market price or value of the securities” — the only basis upon which disclosure of those plans to another person would not constitute tipping would be if the disclosure were made in the necessary course of business. There is very little guidance on the meaning of “necessary course of business” and, until October 2023, we had no substantive decision relating to the interpretation of the exception. The October 2023 decision of the Ontario Capital Markets Tribunal (Tribunal) in Kraft ( Re ) 13 ( Kraft ) dealt with disclosure by a board chair of a public company to a long-time friend of near-final draft documentation relating to a transaction material to the issuer. The chair sent the materials for the purpose of seeking his friend’s input on the transaction and was found to have breached the tipping prohibition. The decision establishes four rules of interpretation: the tipper bears the onus of proving that the disclosure was made in the necessary course of business; the applicable standard is an objective one — the tipper’s subjective belief regarding whether the disclosure was necessary is not sufficient; the exception should be interpreted narrowly in light of the rationale for the tipping prohibition — namely, to ensure that everyone in the market has equal opportunity to receive and act on material information; and necessary course of business does not mean in the “ordinary course of business” and does not connote a mere business purpose, but rather imports a level of importance, including something that is “essential,” “indispensable” or “requisite” to the business. Helpfully, although the Tribunal held that, on the specific facts in Kraft , the necessity exception was to be understood with reference to the “issuer’s” business, it noted that it was not concluding that “in all factual situations the…exception is limited to a consideration of what may be in the necessary course of the issuer’s business.” In other words, the Tribunal left the door open to a finding that selective disclosure may be defensible where made in the necessary course of the tipper’s business. Nonetheless, given the lack of guidance on the application of the necessity exception to disclosures made by activists in the course of a campaign, activists in a special relationship with the company must exercise caution and may be practically constrained from communicating information to other shareholders whose support they are seeking. Caution is also dictated by the fact that Canadian securities regulators have demonstrated a willingness to use their “public interest” jurisdiction to sanction conduct that does not technically offend the statute, but that results in some unfair advantage to the trader or the tippee. 14

13 2023 ONCMT 36. 14 Cormark Securities Inc. (Re) (2023), ONCMT 23; Finkelstein v. Ontario Securities Commission (2018), ONCA 61; Re Suman (2012), 38 OSCB 2809; Re Paul Donald (2012), 35 OSCB 7383; and Re Hariharan (2015), 38 OSCB 3356, 3373.