What’s happening in shareholder activism in Canada?
Many pundits have attempted to predict the impact of COVID-19 on shareholder activism. Some believe that shareholder activism will significantly increase in the current environment, as activists seek to take advantage of low valuations and leverage the effects of the pandemic in their thesis for change. Others suggest that shareholder activists will hold off in the near term given the widespread economic uncertainty and the poor optics of targeting companies battered by macro socio-economic factors outside their control. In Canada, we expect a more nuanced approach from shareholder activists given the country’s relatively shareholder-friendly corporate and securities law regimes. This much is certain: shareholder activists will not be idle.
Recap of shareholder activism in Canada
Shareholder activism in Canada has trended upwards since the Great Recession in 2008. The number of Canadian companies subjected to public demands peaked at 75 in 2018. These numbers are modest compared to those in the US capital markets. However, relative to the US, there are a number of factors that may contribute to activist shareholders viewing Canada as a favourable jurisdiction, such as:
- a shareholder holding a 5% interest in a company may requisition a special meeting to, among other things, remove and elect all or part of the board of directors;
- a shareholder can accumulate 10% of a company’s shares before publicly disclosing its interest, except where the target is subject to a formal takeover bid or is listed on a U.S. stock exchange (in which case the trigger is 5%);
- a shareholder may privately communicate with up to 15 other shareholders without publicly disclosing its intention to solicit proxies or filing and mailing proxy solicitation material;
- a shareholder may solicit proxies without mailing a proxy circular by relying on the “broadcast exemption” which entitles a shareholder (but not the company) to communicate by press release, public broadcast or public speech;
- subject to certain limitations, a shareholder may seek the inclusion of a (non-binding) shareholder proposal in a management proxy circular;
- a current or former shareholder of a corporation may leverage judicial and regulatory tools to enforce shareholder rights, including by:
- using the oppression remedy, a civil remedy that protects a shareholder’s “reasonable expectations,” or
- requesting securities regulators to intervene to enforce minority approval or disclosure requirements or to make other discretionary orders where the securities regulators are satisfied that it is in the “public interest” to do so;
- any person may obtain the shareholder list of a public corporation, on 10 days prior notice, and any shareholder or creditor may obtain the shareholder list of any corporation governed by the Canada Business Corporations Act (the “CBCA”);
- any shareholder of a private corporation governed by the CBCA can demand access to the corporation’s Significant Control Register, which will identify each individual who has an interest or rights in shares carrying 25% or more of the corporation’s voting rights or fair market value or that otherwise has control-in-fact of the corporation;
- a shareholder typically does not have to overcome staggered boards as a defence, which are less prevalent in Canada because companies listed on the Toronto Stock Exchange must elect directors annually; and
- Canadian securities regulators generally favour the interests of shareholders and Canadian courts generally defer to decisions made by Canadian securities regulators.
The near-term impact of COVID-19
Traditional activist activity appears to have decreased globally in the immediate aftermath of COVID-19. In the near term, many shareholder activists are taking steps to protect their own financial health, preserve cash, shore up investor relationships and minimize redemptions. Against this backdrop, activists have to weigh the significant cost of mounting a campaign against the socio-economic uncertainty, unprecedented volatility, the poor optics of an opportunistic attack on a vulnerable target, the ability to engage with shareholders who may prefer stability over distracting incumbent managers, the likelihood of a shareholder meeting being held virtually which favours a company over an activist, and other logistical challenges caused by COVID-19 restrictions.
Moreover, traditional activist demands (such as asset divestitures or spin-offs, share buybacks and increased dividends) may not be compelling theses in the current environment. In Canada, absent exceptional circumstances, we believe that institutional investors are unlikely to support aggressive activism strategies that risk distracting the management of a company that is already under pressure from the significant near-term, and potentially unknowable long-term, adverse impacts of COVID-19. A recent survey of institutional investors revealed that 91% of them would consider investing with a lower rate of return if it meant including sustainable or societal impact investing considerations.
However, the foregoing does not reflect the complete picture based on discussion we have had recently with market participants.
Getting ready to launch a campaign?
Shareholder activists are carefully and quietly positioning themselves to maximize their influence over target companies at the most opportune time, after the initial turmoil of COVID-19 has settled. They are taking steps such as:
- identifying and evaluating potential new targets that appear to have:
- market values that significantly lag intrinsic values,
- become significantly more vulnerable since the onset of COVID-19,
- management teams who are perceived as particularly ill-equipped to respond to the very real challenges posed by the COVID-19 pandemic, and/or
- healthy cash positions or cash flows despite COVID-19;
- stealthily increasing their interests in potential and existing targets at lower market valuations compared to just a couple months ago;
- fine-tuning or re-evaluating their theses against existing targets;
- considering how to manage their public image and messaging in the event of a campaign launch; and
- raising additional funds from investors who believe that the current circumstances are ripe for activism as an investment strategy.
Although each campaign is unique, we expect activists to pitch one or more of the following:
- the target’s incumbent managers were ill prepared to manage the adverse impacts of COVID-19, especially relative to the target’s peers, and cannot be trusted anymore;
- the activist and its proposed nominees are uniquely positioned to right the alleged mismanagement at the target;
- the activist is ready and able to provide much-needed liquidity in exchange for strategic investor rights (and corresponding restrictions on incumbent management and the target);
- the M&A transaction recommended by the target’s board undervalues the target because of an excessive COVID-19 discount; and
- the target’s board should initiate a strategic review given the target’s poor prospect of successfully weathering the impact of COVID-19.
Companies should use this time to prepare
Most companies are in uncharted waters and understandably focussed on addressing operational challenges raised by COVID-19. In the meantime, it is important to anticipate and defend against the potential for an opportunistic activist campaign, and go on the offensive when appropriate. In a recent survey, 90% of Canadian institutional investors surveyed believe that most companies are unprepared for shareholder activism.
Specific steps that a company should take to prepare include one or more of the following:
- monitoring the shareholder base, especially for creeping accumulations and unusual trading volume;
- re-assessing investor relations and communications strategies with a focus on contacting significant shareholders to assess ongoing concerns, solicit suggestions and cultivate support;
- identifying areas of potential vulnerability, especially operational and stock performance relative to peers;
- communicating and selling a short-term and long-term strategy to weather the impact of COVID-19;
- assembling and educating a core internal response team;
- retaining external professionals such as experienced financial advisors, proxy solicitors and legal counsel who bring corporate, securities and litigation expertise;
- assessing the board’s composition and renewal process;
- assessing the company’s compliance with corporate governance practices supported by proxy advisory firms;
- taking appropriate pre-emptive defensive and offensive actions, which may include enhancements to the company’s advance notice bylaw and quorum requirements for shareholder meetings; and
- soliciting “white knight” strategic investors.
These steps can and should begin now so that the company and its board are well-equipped to fend off unwanted private or public overtures from activists. Many of these tasks can begin with discussions among the board and senior management to prioritize and advance specific measures, while engaging proactively with shareholders generally. The alternative – an ill-prepared response to an attack from an activist shareholder who has a carefully articulated thesis – is not advisable in the current climate. The survey of institutional investors noted above found that 95% of them would support a reputable activist investor if they believe change is necessary.
 Shareholder activism generally refers to actions undertaken by shareholders that are aimed at causing one or more changes within or for a corporation. The shareholder actions may span a wide spectrum, ranging from sending a friendly letter of suggestion to a corporation’s management or board of directors to initiating a proxy contest, negotiating with management, commencing legal proceedings or filing a complaint with one or more of the corporation’s regulators.
 The Activist Investing Annual Review, 2019, p. 22.
 Subject to certain conditions, a shareholder having beneficial ownership of less than 10% of a corporation’s shares may acquire economic exposure to the corporation, by way of a cash-settled total return swap (“TRS”), without publicly disclosing the TRS. The conditions include that the shareholder’s swap counterparty cannot be acting “jointly or in concert” with the shareholder concerning the corporation and the TRS cannot entitle the shareholder to vote or dispose of any shares of the corporation in the swap counterparty’s hedge position.
 Lazard's Review of Shareholder Activism – Q1 2020
Shareholder Activism shareholder dispute shareholder litigation proxy fight proxy contest COVID-19 defensive tactics