Over the past decade, proxy contests have gone from a once rare phenomenon to a standard feature of the Canadian corporate world and as the number of contests have increased, so too have activists' success rates. To some extent these trends have been driven by greater acceptance of activists' efforts in the wider investment (and particularly institutional investment) community, but they are certainly also a result of the fact that – as Stephen Griggs, Chief Executive Officer of investment fund Smoothwater Capital Corporation, has recently observed (see page 33) – Canadian corporate law rules make it one of the "most activist friendly jurisdictions in the world."
With a tip of the hat to Mr. Griggs, the following outlines some of the key rights and remedies that can give activist investors significant leverage when it comes to effecting change at a Canadian target company:
- Wider Scope for activists to call meetings: Under the Canada Business Corporations Act, the holders of only 5% of the voting equity are able to requisition a shareholders' meeting on 21 days' notice. By contrast, Delaware corporate law permits only the board or persons authorized by the articles of incorporation or bylaws to call a meeting. Companies rarely entitle a specified portion of its shareholders to call a meeting.
- No staggered boards: Many U.S. companies still retain staggered boards in which only a portion of the seats are subject to election at any time. However, in Canada because shareholders may requisition meetings to replace directors at any time, such arrangements offer no real defence and as such are practically non-existent.
- Cannot "Just Say No": In the U.S., a board may, as a matter of business judgment, "just say no" and refuse to rescind a rights plan, making it impossible for a shareholder to acquire more than a specified percentage of the stock or to undertake a takeover bid without board support. In Canada however, shareholder rights plans are generally only permitted to the extent that they facilitate the development of value maximizing alternatives (i.e. by giving the company a reasonable period to conduct an auction) and it is ultimately the shareholders, and not the board of directors, that decides whether to entertain a hostile bid or not. Typically this period lasts no more than 60-70 days, after which time the regulators will almost always cease trade the rights plan.
- Disclosure of ownership at 10%: Ordinarily, shareholders in a Canadian listed company are only required to disclose their ownership once they acquire beneficial ownership of 10% or more of any class of equity or voting securities. Though proposals have been made to lower the threshold to 5% as per Rule 13D in the U.S, none have been successful. This 10% threshold provides activists with significant latitude to put together an initial position in a target company.
- Private Proxy Solicitation Exemption: This exemption allows a dissident shareholder in Canada to avoid filing and mailing a dissident proxy circular to shareholders if the dissident solicits less than 15 shareholders. This method of solicitation is not only inexpensive, but it can also be very effective, particularly given the concentrated nature of ownership in most Canadian corporations. In a number of cases, activists have used this exemption to solicit proxies from a select number of large shareholders and successfully ambush management at an annual meeting with the activists' own slate of directors.
Activists' ability to "ambush" has been constrained somewhat by the growing adoption in Canada of defensive advance notice by-laws that require the activist to advise the board of its intention to nominate directors and disclose information regarding the nominees. However, such by-laws are not yet widespread and can be complied with relatively easily when compared to similar laws in the U.S..
- The Oppression Remedy: A concept with no equivalent in U.S. corporate law, the oppression remedy enables a shareholder to sue the company for relief in circumstances where the company has "oppressed", "unfairly prejudiced" or "unfairly disregarded" the shareholder's "reasonable expectations". In oppression cases, the courts apply an "effects-based" test and can grant remedies even where bad faith or improper motives are not found.
Although an investor cannot easily "buy in" to oppression that has already occurred, the oppression remedy nevertheless represents a significant piece in the activist's toolbox. It can be used generally to ensure that a target company acts fairly and specifically to counter actions that management may take to secure an advantage in a proxy fight.
Norton Rose Fulbright Canada LLP
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