Canada: Shareholder Activism And Canadian Companies

How To Prevent Your Company From Becoming A Target

Shareholder activism is on the rise. Recent findings show that Canadian companies were targeted by 6% of public activist campaigns worldwide in the last two years. Don't be fooled by the seemingly low rate: thanks to some high-profile battles waged within our borders, Canada has earned a reputation as an attractive place for shareholder activism.

The question is, why?

Many experts blame Canada's "early warning" rules, considered more lax than in jurisdictions like the U.S., for giving shareholders opportunity to acquire an influential stake in a company without management or other shareholders knowing. The same rules produce a relative lack of obstacles for activist shareholders scheming to "ambush" a company at its annual election of directors by electing their own slate.

Will proposed changes make a difference?

Canada's early warning rules require any investor that acquires a 10% or greater stake in a public company to immediately announce the acquisition and intentions publicly and to management. South of the border, a similar disclosure obligation kicks in when a 5% stake is acquired. In this way, Canada gives greater advantage to a dissident or activist shareholder than the U.S., with more opportunity to acquire a bigger stake before management or other shareholders clue in.

In early 2013, Canadian securities regulators proposed dropping the threshold from 10% to 5%. While some worry this change – which is widely anticipated to come into effect this year – will work to discourage activist investor activity in Canada, the truth is that it won't likely make any material difference from a dissident or activist perspective. What it will do is bring our system more in line with that of the U.S., Australia, Germany and other countries.

Even if the system does become a bit more onerous due to, say, timing differences for publicizing ownership between Canada (immediate) and the U.S./other jurisdictions (three to 10 days), the most this would lead to is a slight change in an investor's tactics or timing. In the end, if an activist sees an opportunity to make a change in the management of a Canadian company, that opportunity will be seized.

The 'ambush' and advance notice policies

Activist investors also benefit from Canadian rules that allow shareholders to solicit proxies (votes) from other shareholders without publicly sending out a proxy circular explaining what they're doing, so long as not more than 15 shareholders are contacted.

The bylaws/articles of Canadian companies also typically allow the nomination of directors from the floor of an AGM without prior notice. This can enable dissident or activist shareholders to "ambush" a company's management, and other shareholders, by taking advantage of low proxy returns to nominate their slate of directors from the floor.

An effective response to the risk of ambush is the adoption of advance notice policies, which require shareholders to give the company an amount of notice of any shareholder proposals, including director nominations. Although such provisions are common in the U.S., advance notice policies have been adopted by only about 12.5% of TSX-listed Canadian companies and 24% listed with the TSXV.

Advance notice policies must strike a reasonable balance between maintaining a fair process and the right of shareholders to replace directors. A policy that's drafted and implemented properly will be consistent with shareholder rights and democracy, and of benefit to shareholders because:

  • it will not prevent shareholders from making director nominations;
  • it will ensure an orderly nomination process that requires shareholders to be informed in advance of a proxy contest and receive the relevant information, in a timely way, to knowledgeably vote on contested director elections; and
  • it will prevent "ambushes."

An advance notice policy should contain:

  • a description of when it applies (i.e., to the nomination of directors);
  • a reasonable deadline for notice and a reasonable open period for notice to be given (between 30 and 65 days before an AGM is generally accepted as reasonable);
  • requirements as to disclosure of nominees and their relevant background, qualifications and economic and voting position in the company; and
  • requirements as to disclosure about the shareholders making the nominations, including their economic and voting position in the company.

The best way to adopt these provisions should also be considered carefully, as the process for a B.C. firm is slightly different from businesses incorporated in other Canadian jurisdictions.

Annual board elections and majority voting policies

Several other factors make Canada a relatively attractive place for shareholder activism. To begin, Canadian companies typically elect all of their directors annually, which potentially enables wholesale board changes at an AGM. In fact, with very limited exceptions, all TSX-listed companies are required to elect all directors annually as a result of rule changes implemented in 2013. In the U.S., it is more common for companies to have staggered elections so that only some of their directors are elected each year, making it impossible to spill the whole board at one meeting.

Another factor involves a recent rule change by the TSX requiring all listed companies to adopt majority voting policies in order to ensure a director will be elected at an uncontested election only if he/she is voted in by a majority of votes cast ("first past the post" still applies at a contested election). This is meant to provide shareholders with important rights, enhance transparency by mandating majority voting and improve the dialogue between issuers, security holders and other stakeholders.

So, what's a company to do?

Boards of directors of Canadian public companies ought to be concerned by rising levels of shareholder activism. It's neither difficult nor expensive to take steps to avoid being surprised by an "ambush" at an annual election or by a shareholder launching a public proxy fight.

Appropriate adoption of an advance notice policy is an important first step toward avoiding these surprises – or, at least, ensuring director elections are conducted in an orderly, fair and open manner, with proper and timely information provided to shareholders so they can cast an informed vote. This benefits both the company and its shareholders.

Engagement with shareholders is also key. This may happen through senior management but, particularly for companies that may be the object of disgruntled shareholders, it likely means direct communication between shareholders and directors, minus the filter of management who may be the object of shareholders' unhappiness.

Changes to Canada's early warning rules that will give companies earlier insight into their shareholder base can only help this process.

To the extent that these changes limit or prevent an activist from "lying in the weeds," well, that's a good thing. A shareholder who wants to initiate change should be prepared to do so openly, and the sooner that discussion happens, the greater the chances all parties will be spared the disruption, expense and pain of a public fight.

Originally published by Business in Vancouver.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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H. Jane Murdoch
Melissa Tang, Articling Student
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