Canada: Defensive Tools In Shareholder Activism: The "Voting Pill"

In today’s Financial Post, Barbara Shecter highlighted the use of modified shareholder rights plans (colloquially known as "poison pills") as an emerging defensive tool against opportunistic shareholder activism in Canada. Traditionally, poison pills are used by boards of target companies as defensive tools to guard against unsolicited takeover bids. By expanding the typical definition of "beneficial ownership" in a poison pill (which is typically limited to concepts of ownership and is used to determine whether the poison pill is triggered) by including securities that a shareholder does not own but has a right to vote or the right to direct the voting of, the poison pill could then be triggered where a group of shareholders intend to vote together even if they don't own shares or intend on making a takeover bid. In this context, the poison pill works to defend against predatory "wolf pack" shareholders who intend on using their collective voting power to seek control of the target, instead of making a bid. Such modified poison pills are known as a "voting pill" and, as Ms. Shecter points out, are already well-known in the United States. The rise of advance notice by-laws in Canada are another example of a defensive tool that enjoyed widespread use in the United States prior to becoming popular in Canada.

Given the recent statements by hedge-fund manager Bill Ackman regarding Canadian capital markets as being fertile ground for activists, and the recent cautionary piece by Wes Hall (founder of Kingsdale Shareholder Services) which argued that Canadian public companies are ill-prepared to deal with the next wave of shareholder activism, it is perhaps not surprising that Canadian public companies are receptive to including additional tools, such as voting pills, in their defensive proxy playbook. However, it is uncertain whether voting pills will enjoy the same popularity and success as advance notice by-laws. Proxy advisory firm ISS, for example, does not support the adoption of poison pills that do not exclude reference to voting agreements among shareholders, and securities regulators may be less willing to permit a poison pill to stand where the effect appears to be to prevent proxy contests.

The increasing interest in voting pills however, particularly following the recent rise in popularity of advance notice by-laws, may signal that Canadian public companies are seeking to adjust to the challenges of an increasingly activist corporate landscape. It is a landscape that, as Mr. Hall explains (and as alluded to in the statements of Mr. Ackman), is already familiar to veteran activists, many of whom come from south of the border. For Canadian public companies, such challenges require boards, their advisors, and, where appropriate, securities regulators, to carefully consider the appropriateness of any defensive tool. For shareholder activists, such challenges represent a new frontier of opportunities.

Norton Rose Fulbright Canada LLP

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