Shareholder activism remains a significant element in Canadian capital markets, notwithstanding that proxy battles are becoming less frequent. Kingsdale Advisors reports that there were 20 proxy contests in Canada in the first nine months of 2017, down from 33 in the same period in 2016 and 55 in 2015. However, the “win” rate for activists increased to 70% of fights in 2017, up from 55% in 2016 and 33% in 2015. Recent examples of activist “wins” occurred at Liquor Stores N.A., where the dissidents gained six of eight board seats, and Granite REIT, where Front Four Capital Group and Sandpiper Group gained three board seats.
Nowadays, the preferred initial path of an activist investor is often to engage in private talks and negotiations with management and the board; and to seek the support of other large investors to pressure management for change. Companies are engaging privately with activists on a collaborative basis and implementing changes where the activist makes a convincing case for change. An example is Talisman Energy’s agreement in late 2013 to provide activist investor, Carl Icahn, with two representatives on its board of directors shortly after Mr. Icahn acquired a 7.37% interest in Talisman. In return, Mr. Icahn, for his part, agreed to “standstill restrictions” including an agreement not to conduct a proxy contest, make shareholder proposals, requisition a shareholder meeting, seek additional representation on the board, buy more than 20% of the company, or make comments that disparage the company.
The Public Broadcast Exemption
If agreement between an activist investor and a target company cannot be achieved in private negotiations, the usual next stage is for the activist to take the debate public.
The “public broadcast” exemption from the proxy solicitation requirements1 has been used in about 25% of proxy contests in recent years. Under the exemption, an activist shareholder can solicit support by way of a public broadcast, speech or publication without a dissident proxy circular. Certain materials and disclosure must be publicly filed with the securities commissions, together with the communication intended to be published. Where the exemption is used in connection with the election of directors, prescribed information concerning the proposed nominees must also be publicly filed.
Although issuers are prohibited from soliciting proxies until they have filed a management proxy circular, the case of Smoothwater Capital v. Equity Financial,2 demonstrates that they are not totally handcuffed in responding to a dissident campaign prior to the filing of a circular. In response to a Smoothwater press release criticizing the Equity Board and its decision to delay a requisitioned meeting, the company issued a press release defending the board, criticizing the Smoothwater nominees and indicating that a management proxy circular would be forthcoming. The court held that this was not offside the solicitation rules in that the release merely defended the Equity Board and the date it had chosen for the requisitioned meeting, and did not endeavor to solicit proxies for Equity management.
Similarly, in Central GoldTrust v. Sprott Asset Management,3 the court held that there was no breach of the proxy solicitation rules, finding that a letter of transmittal for the purposes of a merger transaction did not constitute a proxy and therefore there was no need for a circular. In reaching this conclusion, the court also noted that there was no meeting at which the instrument was to be used.
Advance Notice Bylaws and the End of Stealth Proxy Contests
In the past, “stealth” proxy contests occurred relatively frequently in Canada, but are quickly becoming a thing of the past as a result of the rapid adoption of Advance Notice Bylaws by Canadian public companies. Since the June 2012 decision of the Supreme Court of British Columbia in Northern Minerals v. Mundoro Capital,4 which drew attention to their usefulness and legitimacy, over half of Canadian issuers listed on the S&P/TSX Composite Index or the Small Cap Index have adopted Advance Notice Bylaws.
Subsequent to Mundoro, the Ontario Superior Court, in Maudore Minerals v. Harbour Foundation,5 also held that there was nothing unfair or inappropriate in the adoption of an Advance Notice Bylaw to ensure that all shareholders would have sufficient notice of a contested election of directors.
Advance Notice Bylaws do have limitations. The Ontario Superior Court, in Orange Capital v. Partners Real Estate Investment Trust,6 acknowledged that Advance Notice Bylaws are not intended to be a sword in the hands of management to exclude nominations given on ample notice or to buy time to develop a strategy for defeating a dissident shareholder group. Similarly, in Central GoldTrust v. Sprott Asset Management7 the court held that a bidder had not breached the target company’s Advance Notice Bylaws. The court held that securityholders would have no concerns about an election by ambush as they would no longer be securityholders of the company as a result of the merger.
Proxy advisors, ISS and Glass Lewis have specific guidelines concerning Advance Notice Bylaws. Further they will recommend a vote against a director who was on the board at the time Advance Notice Bylaws were adopted and there had been no shareholder approval prior to or subsequent to adoption. The corporate statutes dictate how such provisions may be adopted.
Recently, the TSX has also weighed in on permissible and prohibited provisions in Advance Notice Bylaws. Provisions that frustrate or circumvent shareholders’ rights are not acceptable to the TSX; for example requirements that nominating shareholders attend the meeting or unduly burdensome or unnecessary disclosure or document requirements.
Ability to Requisition a Meeting
Canadian corporate statutes permit shareholders to requisition shareholder meetings between annual meetings, if they hold a specified percentage of shares.
Some judicial decisions have made effective use of the requisition right difficult. For example, the decision of the Ontario Superior Court in Wells v. Bioniche Life Sciences8 held shareholders to a high standard of technical compliance in requisitioning meetings.
However, in TELUS Corporation v. CDS,9 the court of appeal overturned a finding that the requisitioning of a meeting by the registered shareholder was invalid on the basis that it did not disclose the beneficial shareholder. Similarly, the decision in Koh v. Ellipsiz Communications Ltd.10 indicates that the courts may becoming less inclined to allow a requisition to be rejected. In that case, the board had rejected a requisition from a 42% shareholder on the basis that he was unduly pursuing a personal agenda. The court held that the right to requisition a meeting is a substantial and fundamental shareholder right that is not lightly to be interfered with and that establishing that a requisition request is motivated by a personal claim or personal grievance must be established by the board under a very high threshold.
Court decisions have given boards wide latitude in determining how expeditiously the requisitioned meeting must be held, where that discretion is provided in the corporate statute, holding that the decision of when to hold a requisitioned meeting is a decision to be made by the board, applying the business judgment rule. Courts will intervene only if the board is trying to frustrate a bona fide attempt by the shareholder to exercise its rights.
This principle gives target boards a strong tool to control the timing of dissident requisitions. In Bioniche, the Court upheld the board’s rejection of a meeting requisition on the basis that a meeting had already been scheduled for six months away. In another Ontario Superior Court decision, Marks v. Intrinsyc Software,11 the Court upheld the Board’s decision to hold a meeting requisitioned to replace the Board 155 days after the date of the requisition. In a unique decision, the British Columbia Court of Appeal in Harrington Global Opportunities Fund v. Eco Oro Minerals12 held that the lower court should not have adjourned a requisitioned meeting. The court of appeal held that decisions of the lower court dismissing oppression proceedings relating to the conversion of shares shortly before the record date and a decision of the Ontario Securities Commission allowing an appeal from the decision of the TSX approving the issuance were not in conflict and as such there was no basis to adjourn the meeting.
The court refused to intervene and order a meeting in Goldstein v. McGrath,13 where the directors failed to call a meeting in response to a requisition relating to the election of directors because of a deadlock on the board. The court found that the incumbents were attempting to circumvent the requisitionists’ exercise of a clear statutory right. However, the court held that courts should only intervene to order shareholders’ meetings in exceptional circumstances.
Another tool generally available in Canada is the activist investor’s ability to submit shareholder proposals. Corporate jurisdictions across Canada generally allow shareholders, holding a specified amount of shares for a specified time, to make proposals at annual meetings and to have the proposal included in the management proxy circular for the company’s annual meeting.14 The issuer can reject a proposal if it does not relate in a significant way to the business or affairs of the company or if it is not submitted at least 90 days before the anniversary date of the company’s last notice of meeting.
A shareholder proposal can be used to nominate individual directors or to replace an entire board, in which case the proposal must be signed by holders of a specified percentage of shares. For a number of reasons the shareholder proposal provisions, although regularly used to raise social concerns or governance issues (e.g., say on pay votes on executive compensation), are seldom used as a vehicle for director nominations. The deadline for submitting a proposal is effectively four to six months prior to the meeting date and is often passed before an activist investor has firmed-up its plans to take action. Although current proposals would amend the CBCA to change the prescribed period to at least 90 days before the anniversary date of the last meeting, other impediments to use of the proposal mechanism remain. The statutory 500 word limitation is not conducive to advocacy. The provisions do not really alleviate the need to pay for and publish a dissident proxy circular since being included in management’s circular is generally insufficient for success. Also, a robust solicitation will generally still be required.
Although there has been little momentum to adopt US style proxy access provisions in Canada, TD Bank and RBC have recently adopted US style proxy access policies that allow shareholders who have held 5% of the outstanding common shares, with full voting and economic rights, continuously for at least three years to nominate the greater of two directors or 20% of the board. The issuer must include such nominees in the management proxy circular and management form of proxy.
Use of the Oppression Remedy
The oppression remedy is another tool for activist investors. Although, there has been some success in getting the court to intervene in an activist campaign it is generally an uphill battle because of the deference paid to boards under the business judgment rule and the test upon which oppression is based.
In Harrington v. Eco Oro,15 the petitioners requisitioned a meeting in February 2017 for the purpose of replacing the board. The board called the shareholders’ meeting for April 25, 2017, and selected March 24, 2017, as the record date. On March 16, 2017, the board issued shares to certain shareholders issuable under certain convertible promissory notes, which the petitioners alleged had the effect of diluting the shareholdings of all of the shareholders and of likely securing sufficient voting power in “friendly” shareholders for the board to withstand the vote to replace the directors.
The court dismissed the petition finding that it was entirely reasonable for the conversion to occur before the record date to ensure the shareholders of the new shares could participate in the vote to replace the board. Further, there was no evidence that the conversion was not in the company’s best interests and the decision of the board to convert the notes to shares was a legitimate business decision.
A similar result occurred in Jaguar Financial v. Alternative Earth Resources,16 where the court held that the company had not acted oppressively in requesting an extension of time to hold its AGM where shareholders were trying to block a transaction.
In Hastman v. St. Elias Mines,17 the court refused to overturn a Chair’s rejection of dissident proxies where the dissidents failed to correct material misstatements in their dissident proxy circular notwithstanding that the mistake had been pointed out to them.
The court’s reluctance to intervene in a proxy contest has been evidenced by refusals to appoint independent chairs or to impose protocols for a meeting.18
Dissidents achieved some success with the oppression remedy in International Energy v. Mosquito Consolidated.19 The court held that there was an obvious imbalance in the voting system that gave management an unfair advantage.
Applications to Regulators
Another avenue open to an activist is to involve the regulators in a proxy fight. An activist seeking to block a transaction may make a complaint to the exchange alleging a rule violation. An activist may also make an application to a securities commission either by way of an appeal from a decision of the exchange or potentially seeking an order in the public interest.
In Eco Oro Minerals,20 the Ontario Securities Commission effectively reversed a transaction that occurred during a proxy fight to replace the board. The OSC held that even if the transaction was supported by the objective of an improved balance sheet, there was no compelling business objective for the transaction to close prior to the record date that would negate the tactical motive to tip the vote in favour of management.
Although the same facts were involved in both oppression proceedings before the court in BC and in a complaint before the OSC and effectively the same relief was sought in both forums, the court of appeal21 held that both avenues were open to the requisitioning shareholders. The two proceedings were based on different statutes having different objectives. This decision may support bringing a multiplicity of proceedings before both the courts and securities commissions.
The commissions have recognized the tension and overlapping jurisdiction between courts and the commissions previously in the context of private placements.22 The regulations of defensive tactics under securities law which typically apply to take-over bids can also apply to proxy fights.23 If applications are made to a securities commission, other than by way of appeal, the applicant will need to address whether they have standing. In Catalyst Capital,24 the OSC refused to grant standing for an application for better disclosure made shortly before the meeting.
As a result of changes to the take-over bid regime in May 2016 which make it more difficult to succeed in a take-over bid by extending the time it must be open and introducing a mandatory irrevocable minimum tender condition, it is possible that there will be more private placements and perhaps more fights for control by way of proxy fight rather than take-over bids.
Stake building and the Early Warning Reporting System
Canada’s early warning reporting regime was updated in May 2016. Although the Canadian early warning report threshold was not reduced from 10% to 5%, as had been proposed by the Canadian Securities Administrators, the Canadian disclosure requirements were revised to now require more detailed disclosure on the purposes of the acquisition and the shareholders intentions, similar to the US rules.
In some ways, the Canadian early reporting requirements are more onerous then in the US, requiring a shareholder, for example, to file a press release promptly and to file an early warning report within two business days of acquiring securities that meet or exceed the early warning report threshold. In addition, there is a moratorium on a filer acquiring further securities until the expiry of the first business day after filing the report. In the US, while the reporting threshold is 5%, shareholders have 10 days to file the required Schedule 13D report and there is no moratorium on acquiring more shares during the interim. This gives an activist investor in the US a significant window within which to build up a stake sufficient to justify the costs of engagement. The effective reporting threshold in the US is essentially 5% plus whatever additional interest can be acquired during the 10-day window before disclosure is required.
A breach of the early warning requirements in Canada may have an impact on the timing of the meeting during a proxy fight but it is unlikely to result in the shareholder being disenfranchised. In Genesis v. Smoothwater25 the court adjourned the meeting by one month for failure to file early warning reports, rather than the remedy sought of disentitling the dissidents from voting their shares. In Kingsway Financial v. Kobex Capital26 the court did not rule on whether the dissident had breached the early warning requirements, but concluded that there was no evidence that any such breach would influence the vote and accordingly dismissed the application to adjourn the meeting.
Inclusion of Equity Equivalent Derivatives
Proposals to include “equity equivalent derivatives” in calculating the early warning reporting threshold were rejected in the May 2016 amendments to the early reporting requirements but guidance was provided to the effect that securities underlying an equity derivative will be deemed to be beneficially owned (requiring their inclusion in the calculation) where the holder has the ability formally or informally, to obtain or direct the voting of the shares. Equity equivalent derivatives are derivatives that are substantially equivalent in economic terms to conventional equity holdings, and include total return swaps.
Group Formation and Joint Actor Characterization
Canadian securities law requires the aggregation of “joint actors” in calculating whether the early warning report threshold has been triggered. If an activist investor has an agreement, commitment or understanding with another shareholder that they intend to exercise their voting rights in concert, they will be presumed to be joint actors. Moreover, if an activist investor has an agreement, commitment or understanding with another shareholder to acquire shares, they will be deemed to be joint actors.
The decision in Genesis v. Smoothwater27 sheds some light on how to interpret and apply the “joint actor” concept. The case makes clear that circumstantial evidence, such as family relations, communications between the parties and attendance at meetings together, can be taken into account in determining if parties are making concerted efforts to achieve a result. In Genesis, the Court inferred from the conduct of the parties in participating in a call together along with a proxy solicitor and circulating a draft dissident circular that the parties had reached an understanding that they would support a new slate of directors and was clear evidence of “joint actor” status. In Kingsway Financial v. Kobex Capital28 the court confirmed that whether parties are acting jointly or in concert is a question of fact but it must be proven by clear and cogent evidence, including circumstantial evidence but not mere speculation.
Being characterized as joint actors may have additional serious implications for activist investors. Canadian securities laws require an offer to acquire any voting or equity securities that, together with securities already held, represent 20% or more of the outstanding securities of that class must be made through a formal take-over bid to all shareholders (subject to certain exceptions). If activist investors together holding more than 20% form a group of “joint actors”, that will not trigger a formal take-over bid. However, none of them can acquire any additional shares without making a formal take-over bid.
Serious concerns have been raised in a number of significant Canadian transactions where questions have arisen about “empty voting”; where a shareholder votes a security in which it no longer holds an economic interest. In TELUS v. CDS29 the court indicated that it did not have the authority to intervene and recommended legislative or regulatory action. In the Sears Holdings offer to buy the minority shares of Sears Canada, Scotiabank engaged in empty voting in favour of the transaction after refusing to unwind a derivatives transaction with Pershing Square Capital, who opposed the transaction. More recently, the controversy surrounding the July 2017 Tembec/Rayonier transaction about whether Fairfax should vote Tembec shares sold on the record date was resolved after a complaint to the OSC when Fairfax agreed not to vote the shares.
In a strongly worded position statement released in September 2017, the Canadian Coalition for Good Governance has recommended that securities regulators publicly state that they will use their public interest discretion to restrict empty voting where warranted and to provide guidance as to the sorts of situations that will prompt the exercise of their jurisdiction.
Special Compensation for Nominee Directors by Activist Investors
As in the United States, the issue of special compensation arrangements for nominee directors of activist directors has been hotly debated in Canada. In the Agrium proxy fight for example, Jana partners offered its director nominees an initial $50,000 retainer plus an incentive bonus of 2.6% of Jana’s net profit from its $1-billion trading position.
The Jana compensation arrangements were heavily criticized and described as “golden leashes” around the necks of the Jana nominees even though they did not impose any obligations on the nominees other than to stand for nomination. They drew strong negative comments from Alberta Investment Management Corporation, the Canada Pension Plan Investment Board and from Glass Lewis.
The issue arose again in 2015 when E. Hunter Harrison, resigned as CEO of Canadian Pacific Railway under arrangements in which he was relieved of his non-compete covenants in return for waiving his rights to $90 million of earned compensation, benefits and equity incentive awards. On the same day as his resignation, Harrison entered into a consulting arrangement with Mantle Ridge LP, an activist investor firm, in which Mantle Ridge agreed to pay him $84 million plus up to $23 million of tax gross-up. At the same time Mantle Ridge publicly announced that it wished the board of CSX Corporation, a company in which it owned 4.9% of the stock, to appoint Harrison as CEO, with CSX assuming Mantle Ridge’s obligations under the consulting agreement. The CSX board, regarding the economic arrangements in the consulting agreement as extraordinary in scope, held an advisory vote of shareholders in which 93% of shareholders voted in favour of CSX assuming the obligations, presumably fearing the adverse stock price impacts if the plan to hire Harrison did not proceed. Subsequently the board of CSX went ahead and hired Harrison on the basis proposed by Mantle Ridge.
Compensating Brokers for Soliciting Favourable Votes
The Agrium proxy fight also brought under intense scrutiny the controversial practice of a target company paying brokers to solicit favourable votes from retail shareholders in proxy battles. Other examples of the practice include the EnerCare and TELUS/Mason proxy contests.
The use of such fees was considered by the Alberta Securities Commission in PointNorth Capital Inc.30 The ASC declined to invoke its public interest jurisdiction to prohibit soliciting dealer fees. The ASC found that securities laws set out comprehensive and detailed requirements for proxy solicitation and for the conduct of brokers. Soliciting dealer arrangements are not prohibited under such rules. Notwithstanding the ASC decision, it is likely that widespread investor opposition to the payment of such fees in proxy contests will curtail their use in most transactions.
Companies need to proactively engage with shareholders. They need to go beyond the annual general meeting and traditional investor relation activities to develop a framework in which they communicate regularly with significant shareholders on the issues key to such shareholders. They need to develop protocols that protect the corporation from risks relating to selective disclosure, insider trading, tipping, and improper proxy solicitation. Independent lead directors and other board members need to take an active role in managing key shareholder relationships and in communicating the merits of the company’s strategic direction to institutional investors and asset managers.
* Teresa Tomchak and Al Hudec are partners in the Vancouver office of Farris, Vaughan, Wills & Murphy LLP
- National Instrument 51-102 Continuous Disclosure Obligations, Section 9.2
- Smoothwater Capital Partners LP v. Equity Financial Holdings Inc., 2014 ONSC 324
- Central GoldTrust v. Sprott Asset Management, 2015 ONSC 4888
- Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090
- Maudore Minerals Ltd. v. The Harbour Foundation, 2012 ONSC 4255
- Orange Capital, LLC v. Partners Real Estate Investment Trust, 2014 ONSC 3793
- Central GoldTrust v. Sprott Asset Management 2015 ONSC 4888
- Wells v. Bioniche Life Sciences Inc., 2013 ONSC 4871
- TELUS Corporation v. CDS Clearing and Depositary Services Inc 2012 BCCA 403
- Koh v. Ellipsz Communications Ltd. 2017 ONSC 3083
- Marks v. Intrinsic Software International, Inc., 2013 ONSC 727
- Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp., 2017 BCCA 224
- Goldstein v. McGrath, 2017 BCSC 586
- For example, Canada Business Corporations Act, R.S.C., 1985, c. C-44, section 137
- Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp. 2017 BCSC 664 at paras 80-82
- Jaguar Financial Corp. v. Alternative Earth Resources Inc. 2016 BCCA 193
- Hartman v. St. Elias Mines Ltd., 2013 BCSC 1069
- Meson Capital Partners, LLC v. Aberdeen International Inc. 2015 ONSC 532, Maudore Minerals Ltd. v. The Harbour Foundation 2012 ONSC 4255, Kingsway Financial Services Inc. v. Kobex CapitalCorp. 2015 BCSC 2155, but the court did appoint independent chairs in Concept Capital Management Ltd. v. Oremex Silver Inc. 2013 ONSC 7820 (the court concluded that the directors had tried to manipulate the voting process) and Western Wind Energy Corpoartion v. Savitir Capital, LLC 2012 BCSC 1414.
- International Energy and Mineral Resources Investment (Hong Kong) Company Limited v. Mosquito Consolidated Gold Mines Limited, 2012 BCSC 1191
- Eco Oro Minerals Corp, 2017 ONSEC 23 at paras 150-152
- Harrington Global Opportunities Fund Ltd. v. Eco Oro Minerals Corp., 2017 BCCA 224
- Red Eagle Mining Corp. 2015 BCSECCOM 401 at paras 71-73 and Hecla Mining 2016 BCSECCOM 359 (in a joint hearing with the OSC). In both decisions, the commissions refused to cease trade the private placement. See also Point North Capital Inc. 2017 ABASC 121 where the commission considered the overlapping and concurrent jurisdiction between the courts and the commissions in a proxy fight and Central Gold Trust 2015 ONSEC 44
- Genesis Land Development Corp. v. Smoothwater Capital Corporation, 2013 ABQB 509
- Catalyst Capital Group Inc. 2016 ONSEC 14
- Genesis Land Development Corp v. Smoothwater Capital Corporation 2013 ABQB 509
- Kingsway Financial Services Inc. v. Kobex CapitalCorp 2015 BCSC 2155
- Genesis Land Development Corp. v. Smoothwater Capital Corporation, 2013 ABQB 509
- Kingsway Financial Services Inc. v. Kobex Capital Corp. 2016 BCSC 460
- TELUS Corporation v. CDS Clearing and Depositary Services Inc 2012 BCCA 403
- PointNorth Capital Inc. 2017 ABASC 121