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| Kathleen Keller-Hobson |
Shareholder activism has become mainstream in Canada, as it has in the United States. Though U.S. funds have not been as active in the Canadian market, in the last two years there have nonetheless been high profile proxy contests initiated by Pershing Square (in obtaining board and management change at CP), by Mason Capital (in attempting to block a share reorganization by TELUS Corporation) and by Jana Partners (in attempting to implement corporate change at Agrium). Most recently, Icahn Enterprises’ acquisition of a 6% interest in Talisman Energy resulted in two of its nominees being added to the board without the need for a proxy contest.
Canadian corporate and securities laws are favourable to activists. The following discussion highlights five key features of Canadian laws important to an activist in taking a position in a publicly-traded Canadian issuer:
1. Early Warning Reporting
Acquiring 10% or more of the voting or equity securities of a Canadian issuer triggers a requirement to immediately file a press release with an early warning report to follow. Further share purchases of 2% or more will again trigger the disclosure and reporting requirement. Whenever a press release is issued, a one-day trading moratorium is imposed on the investor.
There is also an alternative, monthly reporting system, which may be available to an activist fund which does not intend to make a takeover bid or seek effective control. A report is required to be filed only if the threshold is exceeded as at a month end, and there is no trading moratorium.
Though the Canadian reporting threshold is higher than the U.S. 5% threshold, if the Canadian issuer is also listed on a U.S. exchange, 13D reporting will be triggered at the lower U.S. threshold.
2. Wolf Packs
In Canada institutional investors have been more willing to support activists at the ballot box than join forces at the outset. One overriding concern to an institutional investor is that it not be regarded as acting jointly or in concert with the activist. As a joint actor, its shareholdings will be combined with those of the activist in calculating the threshold for early warning reporting (and it will also be subject to the trading moratorium) and it will be subject to other trading restrictions if material undisclosed information received by the activist from the issuer is passed on. As well, the combined acquisition of 20% or more of the voting or equity securities of the issuer by the activist and joint actors can trigger a formal takeover bid requirement.
It is a question of fact whether shareholders are acting jointly or in concert. A recent court decision found cooperation among dissidents, including a group discussion with a proxy solicitation firm and the sharing of a draft dissident proxy circular, to be sufficient factors to make them joint actors. Note that an agreement among shareholders as to how to vote their shares will give rise to a presumption that they are joint actors. Careful attention must therefore be paid as to whether a joint actor relationship is being created.
3. Nominating Directors
Advance notice by-laws were adopted at a rapid rate starting in 2012, though there are still a significant number of issuers without them. Individual elections for directors rather than slate voting are now required by the Toronto Stock Exchange and staggered or classified boards are prohibited.
Whether it is appropriate for an activist to separately compensate its board nominees is the subject of debate. Such an arrangement was proposed by Jana Partners in its proxy contest with Agrium, with the proposed compensation to be calculated by reference to the profit earned by Jana from its investment over three years. The devil will be in the details in structuring these arrangements to appropriately balance objectives and concerns.
4. Requisitioning Shareholder Meetings
Rather than wait for the next AGM to nominate directors, a 5% registered shareholder can requisition a shareholder meeting at any time. About one-half of all proxy contests in Canada are initiated in this manner. Once a requisition has been made, the directors have 21 days to determine a date for the meeting and if they fail to do so, the shareholder may convene the meeting. However, the directors are not required to convene a meeting if they have already taken certain action to convene another meeting, such as the AGM. There are numerous court decisions which have addressed whether a board’s decision to defer to a later scheduled meeting is reasonable in the circumstances and whether the requisitioning shareholder would be materially prejudiced by the delay. It is critical for the activist to show immediacy in its actions when requisitioning a meeting.
5. Proxy Solicitation
Exemptions are available from the requirement to prepare a dissident proxy circular where proxies are being solicited from 15 or less shareholders or the solicitation is being conducted generally through the media, advertisements or speeches. But to launch a full-blown proxy contest with direct contact with institutional and retail investors, a dissident proxy circular will be required. The circular must be prepared following prescribed guidelines, though no regulatory review is required.
In the Jana Partners/Agrium proxy contest, Agrium offered soliciting brokers a fee for proxies collected in favour of management’s slate, payable only upon election of management’s slate. This tactic attracted significant criticism both with respect to the use of corporate funds and the impact it had on brokers exercising their fiduciary duties. Though not challenged in court, Canadian courts have broad equitable jurisdiction under corporate law statutes to remedy action by an issuer that is oppressive or unfairly prejudicial to a shareholder.
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.
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