Canadian companies are finally taking legal matters into their own hands to head off activist shareholder ambushes.
Over the past few months, more than 100 public companies have instituted advance notice policies that require shareholder groups to give a company’s board of directors a specified time to review proposals and dissident board nominees.
At a McMillan LLP seminar in Vancouver, Paul Davis noted that such policies have been around for decades and have been used by U.S. companies for more than 20 years. The rise in shareholder activism in Canada has prompted companies north of the border to implement similar policies.
According to a Fasken Martineau study, the number of shareholder proxy battles in Canada has nearly doubled over the last three years to 27 in 2012 from 14 in 2010.
Over a five-year period between 2008 and 2012, there were 101 proxy contests, an 84% increase over the 55 between 2003 and 2007.
The past few years have been a lucrative market for hedge funds and other aggressive investors.
“Activist investors in the U.S. see Canada as the land of milk and honey,” said Wes Hall, president and CEO of Kingsdale Shareholders Services Inc. at the McMillan LLP event. “The regulations are completely behind on the times in terms of how people operate today.”
While regulators have required public reporting of shareholders with 10% of a company’s shares, a shareholder with a 5% stake can requisition a shareholder meeting. The Canadian Securities Administrators are proposing to reduce the shareholder reporting threshold to 5% (see “Regulators close loopholes for activist shareholders” – BIV issue 1229, May 14-20).
But shareholders can also talk to up to 15 shareholders without disclosing their intentions to the company’s management. That gives dissident shareholders a significant advantage when plotting to ambush a company. “They can talk to 15 people, get 60% of the vote, which is very likely in many cases in Canada, and can replace the board,” said Hall.
Bob Walker, vice-president at Ethical Funds, noted that some companies that have faced activist shareholder challenges might have needed significant change, like Canadian Pacific Railway (TSX:CP), whose board and CEO were replaced by a slate presented by U.S. hedge fund Pershing Square Capital Management LP.
But he said such a shakeup might not need the confrontational approach of a U.S. hedge fund.
“There is a need for a lot of change in some Canadian boards. Some boards can be quite ossified, and companies do need a shakeup at that level, but we don’t think hedge funds, as some of them behave, is a remedy. There is a made-in-Canada approach to activism where we are non-confrontational and work in collaboration with companies. It’s more fitting with our culture, and I do think it has led to a series of cases where we have seen effective change.” •
