CHAPTER 01 Special Committees: Governance Safeguards for Conflict of Interest Transactions and High-Stakes Situations
– In response to a request from an issuer’s controlling shareholder through its two nominees on the board, the board of directors of the issuer plans to consider whether and on what terms to implement a significant share buyback program. In each of these scenarios, a board would likely consider whether to establish a special committee of independent directors to assist it in making sound decisions and fulfilling its stewardship responsibilities to the corporation. The composition, mandate and compensation of the committee members will vary in each scenario, with the board ultimately making determinations with respect to each matter. Statutory Requirements for Special Committees Although all of the above five scenarios could conceivably call for a special committee, securities law prescribes the formation of a committee in only one of them. If an insider (e.g., 10%-plus shareholder) of an issuer makes a bid for the issuer, Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (MI 61-101) mandates that the board of the target set up a special committee of independent directors, in addition to other measures, to ensure that the process and outcome have integrity and are fair to minority shareholders. MI 61-101 also prescribes various disclosure obligations that the target is required to meet in the context of an insider bid. Additionally, although insider bids are the sole circumstance in which Canadian securities law mandates the establishment of a special committee of independent directors, a previous notice issued by Staff of the Canadian Securities Administrators (CSA) and the reasons given recently by the Ontario Securities Commission (OSC) in The Catalyst Capital Group Inc . (Re) decision involving Hudson’s Bay Company (HBC)
provide critical guidance on the roles of boards and special committees in a wider range of “material conflict of interest transactions” – namely, any transactions that give rise to substantive concerns regarding the protection of minority securityholders. 3 The CSA Staff notice and Catalyst decision advocate for the use of special committees in all material conflict of interest transactions, not just those prescribed by MI 61-101. They also remind issuers that once a special committee process is undertaken for transactions that involve significant conflicts of interest, it will be subject to the same procedural and disclosure standards that would apply if a special committee were legally required. More details about the CSA’s guidance and the key takeaways from the Catalyst decision are contained in our bulletins “ OSC Articulates Expectations of Special Committees in Conflict of Interest Transactions: The HBC Privatization ” 4 Although insider bids are the sole circumstance in which Canadian securities law mandates the establishment of a special committee of independent directors, a previous notice issued by CSA Staff and the reasons given recently by the OSC in The Catalyst Capital Group Inc . (Re) decision involving HBC provide critical guidance on the roles of boards and special committees in a wider range of “material conflict of interest transactions.”
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