A recently released research report by Moody's Investors
Service examines the credit impacts of activist shareholder
activity, arguing that shareholder initiatives do not always
benefit bondholders. In fact, the report suggests that the means by
which shareholders drive change in capitalization and strategy,
including through share repurchases, increased dividends and
divestitures of cash-generating assets, often stresses credit
metrics, increasing the risk of holding corporate bonds.
Moody's argues the risk for bondholders is growing as
activists increasingly identify opportunities in larger credit
rated companies and as these companies take more proactive steps to
avoid being targeted. The report found the industries at the
highest risk are technology, health, energy and retail, which
accounted for approximately 60% of the 220 activist campaigns in
2013. Among other things, activists generally prefer these
industries because of their elevated cash levels, flexibility in
capitalization and less restrictive regulations. At the opposite
end of the spectrum, the tighter regulatory environments,
consistent cash flows and asset mix of companies operating in the
financial and utility sectors, make them much less amenable to
shareholder change. However the risks to bondholders should be put
into perspective. Companies in the financials and utilities sectors
are also the most highly leveraged, boast more robust credit
ratings and generally offer more contractual safeguards for debt
holders, while industries that are more amendable to change carry
much less debt, typically rated at more speculative grades.
In addition, shareholder campaigns that are motivated by desires
to improve corporate governance by demanding more accountability
and strengthening balance sheets through more disciplined
management of capital can improve credit profiles and enhance
bondholder value. A recent example of this is Canadian Pacific
Railway Limited ("CPR") where shareholder concerns at
that company were viewed as credit positive and changes in
management nearly two years ago have resulted in improvements in
cash flow generation and liquidity such that Moody's is now
reviewing CPR's rating for a possible upgrade.
Ultimately, the credit impacts of shareholder initiatives will
vary by company and industry; however, shareholders who initiate
changes and companies taking proactive steps to enhance shareholder
value should be mindful of the impact on a company's
bondholders as well as its broader stakeholders. In the context of
Canadian corporate law that has been more open to imposing broader
responsibilities on directors to treat all stakeholders equitably
and fairly, shareholder initiatives that fail to consider the
potential impact on various stakeholders will generally face a
higher risk of litigation that may interfere with the
implementation of desired changes.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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