Regulators close loopholes for activist shareholders

Aggressive U.S. hedge funds may have a more difficult time shaking up Canadian public company management with new rules being proposed by Canada’s securities regulators
Nigel Cave, partner, Borden Ladner Gervais: Enhancing disclosure of major shareholders increases market transparency

Shareholders and executives will have earlier warning of any shareholder challenges from activist investors with new rules being proposed by Canada’s securities regulators.

The Canadian Securities Administrators (CSA) is soliciting comment for several regulatory changes that would increase the disclosure requirements of major investors.

The most significant change requires shareholders to begin publicly disclosing their holdings once they own 5% of a public company’s shares. Currently, the reporting threshold is 10%.

As part of the proposed changes, derivative investments held by investors would be included in an investor’s 5% threshold.

“There are all kinds of derivative transactions where an investor might be obtaining the economic or voting benefits of shares without owning the shares,” said Nigel Cave, a Vancouver partner at Borden Ladner Gervais. “The CSA wants to include those because there are a lot of arrangements that haven’t been caught by the existing rules, so you have ‘hidden ownership’ or hidden voting control that isn’t obvious.”

The issue of hidden ownership has become a growing concern for Canadian public companies that have faced more aggressive activist shareholders, primarily U.S.-based hedge funds.

Vancouver’s Telus Corp. (TSX:T) faced such a challenge last year when New York-based Mason Capital Management LLC fought Telus for more than half a year to block Telus’ goal of converting its non-voting shares to voting shares. Mason Capital had hoped to financially benefit from defeating the share conversion through its short position on the company’s non-voting shares while owning $1.9 billion in voting shares.

“The changes being proposed are an important step in the right direction,” said Telus spokesperson Shawn Hall. “They go a long way in closing gaps that can be exploited by empty voters. So we’ll be participating in the consultations on the new rules and encourage any corporation concerned about securities law in Canada to do the same.”

Additional changes being proposed by the CSA include:

•requiring major shareholders to publish a press release when they buy or sell at least a 2% stake in a company (currently major shareholders are only required to disclose share purchases);

•requiring all press releases to include more explicit detail over the purpose of a major investors’ share trade, replacing the generic and vague boilerplate releases provided today; and

•preventing certain institutional investors who plan to issue proxies relating to a takeover bid, or board of director elections to use the Alternate Monthly Reporting System to delay disclosure of their holdings.

“This is moderately controversial,” Cave said. “Whether you think this is a good or bad thing depends on where you sit. But, this is driven by the belief that knowing more about what large investors are doing is good market information for investors generally to have.”

Market participants potentially affected by the changes have until mid-June to provide comment.

Bob Walker, vice-president at Ethical Funds/NEI Investments, hopes the changes will help preserve the more proactive and engaged shareholder activism that has evolved in Canada primarily around environment, social and governance (ESG) issues.

“Our approach is based on providing sound arguments to management and, when necessary, to the board, and working with them to change, recognizing there are often barriers to change. We are oriented towards solutions,” said Walker. “This is very different from the way activist hedge funds take action on a company, which is often very media based [and] very often involves calling people names. I don’t think that’s a very useful way to engage people to change.” •

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