Shareholder activism in Canada continued on the rise in 2013. Canadian corporate and securities laws are in several respects favorable to activists. For instance, there is a higher threshold of 10% for early warning disclosure, a 5% shareholder can requisition at any time a shareholder meeting, staggered or classified boards are not permitted, slate voting is prohibited and certain proxy solicitation activities can be conducted without the requirement to prepare a dissident’s proxy circular.
About half of the proxy battles waged were won to some extent by the activists. Given the underperformance of the mining sector, it is no surprise that it was subject to the most activism.
The most talked about issues arose from the Agrium/Jana Partners proxy battle. These were the appropriateness of payments by an issuer to soliciting dealers and of payments by an activist to director nominees.
Jana Partners proposed to compensate its board nominees by reference to the profit earned on its investment in Agrium over three years. Labelled a “golden leash” by Agrium, this may have impacted its loss at the ballot box.
On the other hand, Agrium offered soliciting brokers a fee for proxies collected in favor of management’s nominees, payable only upon successful election of management’s slate. This tactic attracted significant criticism both with respect to the board’s conduct and the impact the compensation has on brokers exercising their fiduciary duties. Though not challenged in court, Canadian courts have broad equitable jurisdiction to grant an oppression remedy where an issuer’s actions have been oppressive or unfairly prejudicial to shareholders.
Activists, more frequently than issuers, commenced litigation in 2013. Legal proceedings by dissidents included demands for issuers to convene requisitioned meetings more quickly, for reimbursement of their expenses when management failed to call the meeting, and for the oppression remedy when their votes were declared invalid. Of particular interest was the courts’ consideration of the appropriate period of time between a shareholder requisition and the meeting. They found that a delay of five to six months was reasonable, deferring to the board’s business judgment. In reaching their decisions, the courts considered whether the AGM had already been called, the cost of calling an additional meeting, the additional demands on management, voter fatigue and whether the activist would be materially prejudiced by the delay. Canadian courts are particularly deferential to the business judgment rule where the board of directors has followed an appropriate process.
In an action brought by an issuer to disqualify activists from voting their shares, the court found that certain cooperation among the activists, including a group discussion with a proxy solicitation firm and the sharing of a draft dissident proxy circular, demonstrated that the activists were acting jointly and in concert. Activists need to be careful to avoid creating an unintended joint actor relationship. Being considered joint actors has implications for the threshold for early warning reporting, as well as the threshold for triggering a formal takeover bid.
Expect to see continued activism in Canada in 2014. As well, a number of changes to securities laws are under consideration though their final formulation and timing are uncertain. This includes proposed changes to reduce the threshold for early warning reporting from 10% to 5% and to capture certain derivative positions, and changes to give shareholders the ultimate decision as to whether a shareholders rights plan should remain in place. The securities regulators are also considering a policy-based approach to the oversight of proxy advisory firms, and reviewing how best to address proxy voting issues, like under-voting and over-voting. Empty voting is also a concern though not yet the subject of reform. Lastly, The Toronto Stock Exchange is considering requiring mandatory voting policies that address the consequences of a director achieving less than a majority of shareholder votes.
2014 will be an interesting year.
KathleenKeller-Hobson is a senior partner at Gowling Lafleur Henderson LLP in Toronto, with over 30 years of experience in public M&A, securities law and shareholder activism.