Canada: Trends and Predictions in Canadian Proxy Contests (September 2017)

Kingsdale Advisors (Kingsdale) recently released its annual Proxy Season Review for 2017. The report examines trends observed in 2017 and provides analysis on what the future may hold for Canadian proxy contests. The report also outlines strategic recommendations for Canadian companies.

Looking back – trends from 2017

  • Shareholder activism: alive and well. Kingsdale reports that despite a drop-off in the number of public campaigns so far in 2017 (21) as compared to 2015 (55) and 2016 (33), the number of public campaigns to-date demonstrates the continued prevalence of activism in Canada with respect to public companies. The report further notes that despite fewer public proxy fights this year, 70% of fights were won by activists with respect to some or all objectives. The success rate in 2016 was just 33%, down from 55% in 2015. Kingsdale attributes the increased levels of success to the following:
    • First, the increased scrutiny and selectiveness of activists at the front end before launching into activism;
    • Second, proxy advisors are more willing to endorse properly structured activist campaigns with positive voting recommendations; and
    • Third, activists may be more willing to accept a partial win when stock prices are up.
  • Compensation: Proxy Advisor scrutiny on the rise. This year Kingsdale tracked a record number of 'against' say-on-pay recommendations (18 from ISS and 12 from Glass Lewis). Of the 18 companies that received an 'against' recommendation by ISS, just four failed their votes. Kingsdale further noted that 2017 yielded the highest number of companies failing to reach the 75% ISS threshold for support. Kingsdale attributes this increase to two factors: an indication of shareholders' increased activeness on pay issues, and the increase in total number of ISS recommendations. Kingsdale prescribes more board diligence as the primary means of addressing this uptick, to combat potential compensation controversies before they surface.
  • Key Governance Developments. Some key governance developments identified by Kingsdale include:
    • The emergence of virtual AGMs. Virtual AGMs have been taking place in the U.S. since 2009. However, they have been almost non-existent in Canada. ISS has announced that it is currently soliciting feedback on the use of virtual meetings as part of its 2018 policy survey;
    • The TSX released additional guidance regarding majority voting and advance notice policies for TSX-listed companies. According to Kingsdale, the TSX belief that current proxy advisor guidelines for the notification periods are acceptable, as they relate to advance notice, is particularly noteworthy. While the TSX noted several provisions that it considers inconsistent with advance notice policy objectives, Kingsdale expects these concerns to be formally reflected in the advance notice provision guidelines of ISS in the coming year; and
    • In light of recent proxy access proposals, Kingsdale advises that issuers should expect to receive proxy access proposals in the future.
  • What chilling effect? Despite widespread anticipation that the adoption of the new hostile takeover regime signalled the beginning of the end, seven hostile bids were launched since the rules came into effect on May 9, 2016. This represents the same number of hostile bids launched in 2014 and one more than the total number launched in 2015. The number of hostile bids has remained constant but the tactics employed by such bids have changed. Some keys to success under the new rules include: potential bidders approaching targets with win-win value propositions, entering hostile bid situations with larger numbers of shares locked up in advance and making cash offers.

Issues on the Horizon

Looking ahead, Kingsdale identifies several issues on the horizon for public companies:

  • Environmental, social and governance issues in the limelight. Environmental, social and governance (ESG) issues are increasingly on the radar of investors and ESG considerations can often drive investment decisions. Kingsdale warns that, given ESG trends, issuers should brace for increased demand of enhanced disclosure. Investors are increasingly confident that long-term sustainability can co-exist with long-term results. Issuers should expect more scrutiny on ESG issues from investors moving forward.
  • The Active Passive investor. Activist action need not necessarily be catalyzed by traditional short-term activists. Kingsdale notes that passive investors can no longer be considered passive when it comes to governance and voting and points to the increasing trend of withhold votes against directors on S&P/TSX Composite companies as a likely indicator that more index funds are willing to vote against directors on key governance issues. Institutional investors are directing more resources into building internal governance teams and actively engaging the companies they own to incite higher standards of corporate governance and transparency in reporting as a means of helping to create value.

Recommendations

The report closes with Kingsdale's advice for the coming year, and emphasizes two points in particular:

  • Evolving role of proxy advisors. Kingsdale alerts issuers to the constantly evolving role of proxy advisors. In particular, Kingsdale notes that proxy advisors have been tightening their policies. In turn, this impacts the outcome of contested meetings, standard annual meetings and transactional meetings. Management should take note and spend time with governance advisors to anticipate proxy advisors' concerns. Kingsdale predicts that the role of proxy advisors will continue to grow, particularly in respect of the importance of proxy advisors' vote recommendations.
  • Friendly deals: a relic of time gone by. Kingsdale reports that straightforward friendly deals are a thing of the past. The routine merger or plan of arrangement now comes with increased risks and friendly deals are no longer the sure thing they once were. The increase in shareholder intervention in transactional matters is demonstrative. To ensure deals are more resilient, boards should know their shareholder base and the valuations put on the business. Another key tool to keep in the toolbox of boards is voting lock-ups. Should an activist emerge, the board should resort to a previously established contingency plan.

The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

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Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

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