Shareholder activism continues to evolve in Canada. As the
tactics of activists have become increasingly sophisticated, boards
have responded by expanding and refining their defensive tactics. A
recent example is the growing popularity of contractual
restrictions on transferring shares to certain classes of
shareholders, including specific activists. This new strategy has
attracted the attention of the Ontario Securities Commission (OSC)
and may prompt regulatory intervention.
Share Transfer Restrictions – A New Defense to
Canadian public companies may restrict the transfer of their
shares if the authority to do so is contained in their articles of
incorporation, and both Canadian and U.S. companies have used
shareholder agreements to prevent shareholders from transferring
their shares to "activist investors". Initially, these
restrictions simply prohibited a shareholder from transferring
shares to anyone engaged in an activist campaign involving that
specific issuer. More recently, issuers have broadened the
restriction to prohibit any transfer to specifically identified
activist investors including, in some instances, any investor
included on published lists of activists.
These provisions are designed to make it more difficult for
well-known activist investors to accumulate a significant ownership
interest in the issuer, thereby presumably making it less likely
that the issuer will be targeted by those investors.
The OSC's Concerns
In response to these developments, the OSC has expressed concern
about "extraordinary actions by issuers that may deter or
hinder shareholder activism that is otherwise compliant with
corporate and securities laws." These concerns are consistent
with the OSC's views on so-called "voting pills"
(shareholder rights plans that prohibit shareholders who
collectively own more than a specified percentage of shares from
acting in concert with respect to their voting rights).
It is unclear whether the OSC will take steps to prevent broad
restrictions on the transfer of shares to activist investors or
other proxy contest defensive tactics such as voting pills. While
the OSC's traditional enforcement tool – the "cease
trade" order – may have limited utility in this context,
the commission retains broad public interest powers to fashion
appropriate remedies. The OSC is mandated to protect investors and
to foster fair and efficient capital markets. If the ongoing legal
"arms race" between activists and boards continues to
escalate, the OSC may feel obliged to intervene to restrain tactics
that it believes unduly prejudice shareholder rights.
The Future of Shareholder Activism in Canada
Canada is typically viewed as a "shareholder friendly"
jurisdiction. Activist investors may have been emboldened by recent
victories, as well as by a regulatory framework that makes it
easier for shareholders to influence corporate governance, such as
by requisitioning a shareholder meeting with as little as 5% of a
company's shares. The use of share transfer restrictions as a
defensive tactic against activism that is increasing in scope and
sophistication may have limited effect where activists remain free
to accumulate enough shares from unrestricted sellers on the public
market to initiate a contest. Nonetheless, the tactic is testing
unsettled areas of securities regulation, where the reaction of the
OSC and other regulators cannot be accurately predicted. Issuers or
activists who wish to deploy untested tactics should carefully
weigh the risk of regulatory intervention before proceeding.
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