Since it costs a lot to win, and even more to lose,

You and me bound to spend some time wondering what to choose.

Deal – The Grateful Dead

IIROC recently published guidance regarding managing conflicts of interest arising from soliciting dealer arrangements. The guidance elaborates on existing conflict of interest rules in the context of takeover bids, plans of arrangement, proxy contests and other securities transactions involving various types of solicitation fees.

Soliciting dealer arrangements are relatively common in Canadian M&A transactions, but less so in connection with contested director elections. Contested director elections where a company pays fees to incentivize dealers to advise their clients to vote in favour of management’s nominees have proven controversial. In this regard, IIROC states that:

We believe that in some cases the conflicts of interest arising from these arrangements can be addressed for example by, appropriate policies and procedures. However, there are other arrangements where the conflicts are, in our view, unmanageable and therefore should be avoided. An example of this type of arrangement is one that relates to a contested director election involving fees that are paid only for votes in favour of one-side and /or only if a particular side is successful.

Contested director elections are, in IIROC’s view, unique in that they involve qualitative assessments—often without measureable or quantifiable supporting information—about an issuer’s future business strategy and the ability of competing slates of directors to successfully implement the strategy.

The guidance does not provide an absolute prohibition on one-sided and/or contingent arrangements in situations outside contested director elections. In other situations, IIROC’s guidance indicates that dealers should consider the specific situation in light of the relevant facts and circumstances, and consider if they can adequately address conflicts of interest. In such circumstances, IIROC notes that disclosure alone is generally an inadequate mechanism because of its limited, and sometimes contradictory, impact on the client’s decision-making process. As a result, IIROC advises that dealers should not only disclose the conflict, but also identify how it has addressed the conflict in the best interest of the client.

For further information on this development, please contact any member of our Securities and Mergers and Acquisition Group.