Success breeds imitation. The persistence of that cliché
is good evidence of its accuracy. Its implications, however, may be
a warning call with respect to shareholder activism in Canada.
The woes of Valeant Pharmaceuticals International Inc.
("Valeant") and its share price have been well documented
in the media. Following a report by Citron Research, who held a
short position in Valeant, alleging improper revenue recognition,
Valeant's shares fell precipitously: on the day prior to the
report, October 20, 2015, Valeant's shares closed at $190.85
(CDN) on the TSX. On October 22, 2015, Valeant's shares closed
at $144.05. By now, Valeant's shares have declined to under
$40, albeit not solely on the basis of Citron's
It is not my intention to recite in depth the news surrounding
Valeant. Its plight does, however, highlight an important form of
activism that should not be overlooked: short-selling activism.
In broad strokes, the practice of short-selling activism
involves an activist taking a short position on a company, while
publically identifying reasons why the share price is overvalued
– often (but not always) through explosive allegations of
fraud or criminality. The practice is not particularly new, with
well documented cases of public shorts in North America in 2011 and
2012, but the Valeant case represents one of the largest, most
notorious, and most consequential public short in Canada in recent
memory. It is a fair assumption that this notoriety may lead to an
uptick in short-selling activism, and it is an issue that boards
should be prepared to address.
Traditional shareholder activism generally seeks to increase a
corporation's share price, at least in the short term.
Short-selling activists, in contrast, only profit when a
company's share price declines. The dissimilar incentives as
between shareholder activism generally and short-selling activism
means that responding to this unique form of activism, or being
prepared in advanced to respond to it, presents unique
We have outlined strategies for responding to shareholder
the past, and our Special Situation Team, in collaboration with
The Boston Consulting Group and RBC Capital Markets, has released a
white paper addressing defensive strategies to shareholder
activism. Many of these strategies, including engagement with
long-term shareholders, good governance, and proactive board
involvement in value creation, remain relevant and important to
defending against virtually all forms of activism. Engagement with
the activist, however, which may be beneficial in responding to
traditional activism, has little to recommend itself in the context
of short-selling activist, as it is effectively a zero-sum
situation: there can only be one winner when one party seeks value
creation and the other value destruction. Consequently, a board
should be prepared to adopt a significantly more aggressive
strategy in dealing with a short-selling activist, and should
expect the activist to respond in kind.
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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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