SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-13-10374-00CL
DATE: 20140116

RE: SMOOTHWATER CAPITAL PARTNERS LP I, Applicant

AND:

EQUITY FINANCIAL HOLDINGS INC., Respondent

BEFORE: T. McEwen J.

COUNSEL:
Orestes Pasparakis and Jennifer Teskey, for the Applicants

Andrew Gray, for the Respondents

HEARD: January 14, 2014

ENDORSEMENT

[1] Given the time constraints surrounding this matter, I am taking the liberty of releasing my decision by way of endorsement.

[2] This is an application under s. 247 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “Act”). The applicant, Smoothwater Capital Partners LP I (“Smoothwater”), seeks an order directing that the respondent, Equity Financial Holdings Inc. (“Equity”), comply with, and be restrained from, acting in breach of s. 150 of the Act.

[3] The dispute surrounds a press release issued by Equity on December 10, 2013, entitled “Equity Financial Holdings Inc. Sets the Record Straight” (the “Equity press release”). Smoothwater takes the position that the Equity press release is clearly “calculated to result in the procurement or withholding of a proxy”, and is therefore a “solicitation” as defined in s. 147 of the Act. Accordingly, Smoothwater submits that s. 150 prohibits Equity from soliciting proxies prior to sending a management proxy circular. Since Equity has not yet sent a proxy circular, it has breached the provisions of s. 150.

[4] Equity submits that the Equity press release was not a proxy solicitation, but rather disclosure intended to address inaccurate statements made by Smoothwater in its own press release. It is also an attempt by Equity to keep its shareholders informed at a critical time.

[5] Equity further submits that in any event, s. 150 does not require it to deliver a management proxy circular prior to soliciting proxies. Lastly, Equity submits that the Court should not exercise its discretion under s. 247 given the circumstances of this case.

[6] For the reasons below, I find that the Equity press release does not constitute a proxy solicitation and dismiss the application.

[7] It is noteworthy that the Equity press release was part of a number of press releases issued by Smoothwater and Equity. The press releases were initiated by Smoothwater’s requisitioning of a meeting of shareholders and the ultimate date chosen by Equity of March 28, 2014. On the same day that Equity announced the date of the shareholders’ meeting, December 5, 2013, Smoothwater issued a press release that was, among other things, critical of the timing of the meeting. That press release included a letter addressed to Equity’s board of directors (the “Board”) from Smoothwater that contained other criticisms of the existing Board. The Smoothwater press release included a proxy solicitation.

[8] Five days later, the Equity press release was issued in which it defended the Board’s historical actions. It was also critical of Smoothwater. The criticisms included the fact that “dissidents”, including Smoothwater, had initiated a costly and unnecessary proxy fight prior to any meaningful conversation with management or Equity’s Board. The press release concluded with the following statement:

The Board will continue to engage with shareholders and consider their views. In connection with the Annual and Special Meeting of Shareholders, the Corporation will provide a management information circular that will be mailed to shareholders and posted on the Corporation’s website and SEDAR.

[9] In considering this matter, I accept the applicant’s submission that the term “solicitation” is to be defined broadly and in an inclusive manner, and that the determination of the existence of a solicitation is a question of fact depending on the nature of the communication and the circumstances of its transmission: H.R. Nathan and M.E. Voore, Corporate Meetings Law and Practice, looseleaf (Toronto: Thomson Reuters Canada Limited, 1995-2013).

[10] In furtherance of its position, Smoothwater relied on a number of cases in which courts found that a solicitation had taken place. It submitted that the Equity press release was more offensive than the solicitations in those cases: Western Mines Ltd. v. Sheridan, [1975] B.C.J. No. 54 (S.C.); Brown v. Duby (1980), 1980 1734 (ON SC), 28 O.R. (2d) 745 (H.C.J.); Polar Star Mining Corporation v. Willock (2009), 2009 11436 (ON SC), 96 O.R. (3d) 688 (S.C.); and Kaufman v. The Cooper Cos., 719 F. Supp. 174, 1989 U.S. Dist. LEXIS 8842.

[11] In my view, the communications in Western Mines, Brown and Polar Star went further than the Equity press release. For example, in Western Mines and Brown the communications expressly referenced an intention to solicit. In Polar Star four press releases were in issue. Further, in each of the aforementioned cases cited by Smoothwater, it was not the company that issued the communications, but rather shareholders. Accordingly, it is an imperfect analogy since there was no corporate position to defend. For these reasons the cases are distinguishable.

[12] In this case, Smoothwater commenced soliciting proxies relying on the exception set out in s. 150(1.1) of the Act, which is unavailable to Equity. The mere fact that Smoothwater commenced the solicitation process does not mean that the Equity press release constitutes a solicitation of proxies. The Equity press release must be looked at on its own.

[13] In my view, the nature of the Equity press release and the circumstances of its transmission do not constitute a solicitation. Reviewed in context it defends, amongst other things, its history, leadership and explains why it is combining the date of the Annual and Special Meeting of Shareholders. It is inevitable that, when involved in a proxy fight, anything said by Equity could be characterized as a solicitation but the principal purpose of the document cannot be ignored. In these circumstances, it is also reasonable that Equity would take issue with Smoothwater’s track record given the criticisms levelled by Smoothwater.

[14] Further, the Equity press release does not encourage shareholders to provide Equity with proxies but rather, in conclusion, advises that a management information circular will be provided to shareholders in advance of the Annual and Special Meeting of Shareholders. It stopped short of requesting proxies from shareholders. There is no evidence that Equity has released any further press releases to which Smoothwater takes issue. Taking all of the circumstances together, Equity was entitled to respond to Smoothwater in a single press release. This is not to say that in the present circumstances a series of press releases could not constitute a solicitation but that is not the issue before me.

[15] I therefore find that Equity did not breach s. 150 of the Act as the principal purpose of the Equity press release, when placed in context, was to provide certain explanations and defend its historical position, not to solicit. The fact that it was raised during a proxy fight does not detract from this.

[16] Having found that Equity did not breach s. 150 of the Act, it is unnecessary to consider the remaining two issues raised by the respondent.

[17] The respondent is entitled to its costs fixed in the amount of $20,000. The applicant concedes this amount is reasonable.

T. McEwen J.

Date: January 16, 2014