Against campaigns can throw corporate boards in disarray as dissident shareholders attempt attacks to vote one or more directors off a company’s board. In the 12-month period from July 2022 until June 2023, Kingsdale Advisors reported that six Against Campaigns were launched by shareholders pursuing activist agendas. This is also when amendments to the Canada Business Corporations Act (CBCA) came into effect, including a majority voting requirement in uncontested elections. Just months after the amendments took effect, we saw the first-ever Against Campaign relying on the CBCA majority voting requirement, which was soon followed by a string of similar campaigns in 2023.
Our top-ranked Special Situations Team has carefully developed a defence tactic to increase transparency and help companies defend against an attack by developing a by-law that companies can adopt to guide directors’ elections. The proposed by-law was launched after consultation with market participants during a high-profile webinar on September 27 – Campaigns in uncontested elections – updating your advance notice by-law – available for viewing. The Advance Notice By-Law was developed to help issuers level the playing field and shed light on Against Campaigns.
Majority voting for directors in uncontested elections: A new tactical tool for dissidents
Under the CBCA majority voting requirement, shareholders are now able to vote “for” or “against” a nominee director in an uncontested election (instead of “for” or “withhold” under the previous system), and each nominee director must receive a majority of “for” votes to be elected. Further, if a nominee director does not receive a majority of “for” votes, they may not be appointed a director by the board before the next annual meeting of shareholders, except if necessary to ensure the board has the requisite number of resident Canadians or independent directors. Note that if an incumbent director fails to obtain a majority of “for” votes at the shareholder meeting, that director may be able to continue as a director for a transition period of up to 90 days following the meeting. Pre-existing majority voting requirements (imposed by certain stock exchanges) generally require directors to tender their resignation if they do not receive a majority of “for” votes, but the board has the option of not accepting their resignation in “exceptional circumstances.”
Accordingly, one of the major implications of the CBCA amendments is the removal of this discretion in its entirety, which has been the subject of scrutiny and criticism by market participants. Indeed, one such critique was focused on the possibility that dissident actors could use this instrument as a tactical means to target directors for removal and, unsurprisingly to some, that is precisely what has transpired once the amendments were effective: dissident actors have relied on this new requirement to remove directors by way of Against Campaigns. These campaigns can be highly disruptive and are often conducted as “stealth” or “late announcement” campaigns, leaving management with insufficient time to respond and effectively engage shareholders.
Transparency for against campaigns and advanced notice by-law: A solution for CBCA issuers
Our Special Situations Team developed a novel solution to help issuers prepare for these attacks and prevent dissident actors from utilizing “stealth” or “late announcement” Against Campaigns by launching the Transparency for Against Campaigns By-law.
The Transparency for Against Campaigns By-law provides for the automatic postponement of any shareholder meeting involving an uncontested election of directors where no notice of an Against Campaign has been provided and the sum of (A) all proxies that are or could be voted against directors and (B) all votes that are or could be cast against directors is greater than a certain percentage of total votes that are instructed to be cast, or that could be cast at the meeting as of the proxy cut-off date. This percentage (or threshold) is set based on the percentage of votes that could be indicative of an organized Against Campaign, as well as other factors. Depending on the needs of an issuer, the by-law may be tailored to, among other things, adjust the length of the notice period and meeting postponement or provide for increased quorum requirements where appropriate. Notably, the board has the discretion to waive the application of the by-law as appropriate. For example, a board might consider waiving the by-law where there has not been an organized Against Campaign, or postponement may result in non-compliance with the deadlines for an annual general meeting set out in the CBCA and stock exchange rules and relief in respect of these deadlines has not been obtained.
The objectives underlying the Transparency for Against Campaigns By-law are well established in the context of advance notice by-laws, and the automatic postponement is carefully designed to address these goals:
- Prevent an ambush: Ensures shareholders have sufficient notice of a challenge to the board before voting takes place (particularly in circumstances where shareholders who may not otherwise have voted may choose to do so if they are aware that one or more of the nominee directors might not be elected).
- Transparency: Provides shareholders with disclosures about the persons challenging the board, including the extent of their interests in the corporation and disclosure regarding any joint actors.
- Unoppressive: Protects shareholder voting rights by preventing “sneak” attacks and provides the board with discretion to waive the by-law to ensure appropriate application.
This by-law levels the playing field with respect to Against Campaigns, ensuring that companies have ample disclosure and that all shareholders can make informed decisions based on all the information available. Our award-winning team is here to help, answer questions or help companies implement this new by-law. We encourage companies to reach out directly for strategic advice, comments or questions for our lawyers.
Walied Soliman is the Canadian chair of Norton Rose Fulbright and co-chair of the Special Situations team. He is widely regarded as one of Canada's leading lawyers in his field, having been involved in some of the most significant and complex M&A transactions and proxy battles in the country, advising buyers and sellers, boards, hostile bidders and shareholder activists. In addition, his practice focuses on restructurings, corporate finance, governance and structured products.
Nader Hasan is a senior associate on the corporate, M&A and securities team at Norton Rose Fulbright. He is also a member of the Canadian special situations team advising clients on shareholder disputes and shareholder activism, including proxy fights. Mr. Hasan has robust M&A expertise, often acting on behalf of companies in friendly and hostile M&A transactions, including statutory plans of arrangement, takeover bids and amalgamations. Mr. Hasan is also a securities lawyer supporting companies and investment banks in reverse takeover transactions as well as public offerings, including initial public offerings and private placements. He has experience working with clients in a variety of industries ranging from cannabis and mining to technology and gaming (including e-sports).
Mr. Hasan keeps abreast of the latest trends in the legal world and is co-editor of Norton Rose Fulbright’s Special Situations Law blog and Inside Sports Law blog.
Brandon Schupp is an associate at Norton Rose Fulbright. His practice focuses on M&A, corporate governance and shareholder activism.
Before becoming an associate, Mr. Schupp articled at Norton Rose Fulbright where he acquired hands-on experience working on a broad range of business law matters.
Brandon Schupp was awarded the Chancellor's Prize and Gold
Medal from Western University in 2016 and was the recipient of the Davies Ward Phillips & Vineberg LLP Prize in contracts in law school.
Silas Lee is an associate at Norton Rose Fulbright's Toronto office in the business law group, focusing on M&A, corporate governance and shareholder activism, with experience in special situations.
He holds a J.D. from Osgoode Hall Law School and an MBA from the Schulich School of Business at York University. Previously, he completed his undergrad at Brandon University, where he graduated ranking first in his class and was selected by the faculties to receive the Gold Medal in Business Administration.