Canadian investors may have yet to discover their own Greta Thunberg, but dissident shareholders increasingly are challenging securities issuers’ management with the support of big investors, regulators and courts.
A report from Toronto-based proxy consulting firms Gryphon Advisors Inc. and FrontLine Advisors Inc. indicates that activist campaigns in the first seven months of 2019 outnumbered the total number of campaigns for all of 2018, with 30 new activist efforts launched to the end of July, up from 26 for all of 2018.
The consulting firms count activist campaigns as the efforts by shareholders’ of public companies to challenge the management of those companies. These efforts include attempting to replace directors, requisitioning a shareholders’ meeting and other forms of opposing management. The consultants don’t count hostile takeover bids among these activist campaigns.
The Gryphon/FrontLine report indicates that this year’s increase in activism is stoked by a rise in the number of campaigns involving proposed corporate transactions – such as investors contesting companies’ merger and acquisition plans. These kinds of battles account for 37% of the activism to the end of July, up from just 8% in all of 2018, states the report. At the same time, battles over board seats are down to 53% this year from 88% of all activist efforts last year.
Increasingly, foreign activists are mounting these campaigns. According to Gryphon/ FrontLine data, 27% of this year’s activist efforts as of the end of July originated from outside of Canada and the U.S., up from just 4% for all of last year.
One likely reason for this, the Gryphon/FrontLine report suggests, is the generally higher success rate for activists in North America. In the past two years, states the report, international activists have gotten their way about 22% of the time, compared with 47% in both Canada and the U.S. over the same period.
Big investors also are becoming more vocal. A report from Davies Ward Phillips & Vineberg LLP (DWPV), a Toronto-based law firm, suggests that one of the most significant changes to the Canadian corporate governance landscape in the past couple of years is a newfound willingness for traditional institutional investors to engage publicly in activist efforts.
The DWPV report points to a couple of recent examples, including M&G Investment Management Ltd., a U.K.-based asset manager, launching its first-ever proxy contest to challenge the management strategy of Vancouver-based Methanex Corp. earlier this year. The DWPV report suggests that Canada’s financial market is likely to see more activism by large investors in the years ahead.
“[W]e expect the growth of index investing, coupled with less liquidity in Canada compared with other markets, [will mean institutional shareholders will find] selling their shares [more difficult]in the face of poor performance,” the DWPV report states. Instead, institutional investors will increasingly feel moved to take a more active role in enhancing corporate performance as a means of protecting their investments.
At the same time, there is increasing activism in Canada from the opposite end of the investor spectrum: short-sellers.
“Over the past few years, short-seller activism has grown from a ‘low-profile affair’ to a major challenge for securities regulators and governing boards,” the DWPV report notes, adding that companies should expect this trend to continue in the years ahead.
At the same time, the legal and regulatory environment in Canada is looking ever kinder to shareholders. For example, recent amendments to federal law mandating majority voting, codifying directors’ fiduciary duties and requiring advisory votes on executive pay “are decidedly shareholder-friendly,” states a report from Toronto-based law firm Cassels Brock & Blackwell LLP (CB&B).
Other notable developments this year – both in the courts, and from securities regulators – also favour shareholders.
In May, the Investment Industry Regulatory Organization of Canada (IIROC) issued new guidance on soliciting dealer arrangements. The guidance doesn’t explicitly prohibit management from “buying” votes (by paying dealers a fee for securing investor votes), but the guidance does indicate that these arrangements can create conflicts of interest for dealers and should be avoided.
As a result, the DWPV report states, IIROC’s guidance is “sufficiently direct that we expect dealers will decline to participate in these one-sided fee engagements in the future.”
At the same time, a couple of decisions in British Columbia this year – one by the B.C. Securities Commission (BCSC) and one by the courts – also favour shareholders over management.
In a dispute over a private placement by a TSX Venture Exchange-listed company, which prompted applications from dissident shareholders to both the BCSC and to the Ontario Superior Court of Justice, the BCSC rejected the company’s argument that having to deal with both a regulatory proceeding and a court case in different provinces on the same issue was unfair to the listed company.
The BCSC ruled that its job of overseeing the TSXV is “completely different” from the court’s role in deciding legal issues.
According to CB&B’s report: “Forcing an issuer to defend on multiple fronts while focusing on managing the business, often at tumultuous times, can produce a tactical advantage in the right circumstances.” The report adds that more of these sorts of cases are likely to come before Canadian regulators.
In addition, a Supreme Court of B.C. ruling earlier this year overturned a company’s decision to reject certain votes cast by a dissident shareholder that would have enabled him to replace the existing board of directors with a new slate of directors. The court ruled that the votes were denied incorrectly, and that the alternative slate should be instated.
Regarding that decision, the DWPV report states: “The court concluded that the entire regulatory scheme is geared to facilitating shareholders’ right to vote.”
With both courts and regulators defending the rights of shareholders, and institutional investors becoming more engaged, investor activism in Canada looks set to flourish.