Written By Byron Tse, William Osler, John Piasta, Kristopher Hanc and Annie Tonken
With the dual threat of the global COVID-19 pandemic and the oil price war between Russia and Saudi Arabia, financial markets in Canada and around the world have suffered heavy losses. As uncertainty looms, a variety of social and economic factors may result in activist shareholders looking to either regain the value of their investments or alter companies' business direction and strategy.
Investor activism continues to evolve and grow in light of the ever-changing global political and financial landscape, and it would be prudent for companies to anticipate and proactively prepare for potential activist action. With the volatility surrounding the current health and economic landscape, companies may become particularly vulnerable to shareholder activism. Companies should continually emphasize robust and active engagements with shareholders to understand the concerns of significant and institutional shareholders.
Canada's Activist-Friendly Environment
Canada's regulatory framework permits activist activity. Disclosure requirements under securities laws allow shareholders to accumulate 10 percent of a company's shares before disclosing their interest. In addition, activists may "quietly" solicit the support of up to 15 shareholders before filing and mailing proxy solicitation materials or publicly disclosing their solicitation intentions. The requirement for directors to be elected on an annual basis as required by the Toronto Stock Exchange also effectively prevents a board of directors from staggering elections to maintain greater continuity.
Activism is typically spurred by perceived underperformance of a company, but additional environmental and social factors now have an increased role. Traditional activism often challenges company management for poor market and financial performance, excessive executive and board compensation, a lack of communication and transparency regarding corporate strategy or transactional activity or a lack thereof. Additional factors such as climate change policies, employee pay practices, board diversity and corporate culture have garnered increased and profound impact given that such movements have been highly successful in garnering public attention and support and are now also being leveraged by activists to pressure management. Activist campaigns have also made use of social media platforms such as YouTube and Twitter to promote their causes and highlight grievances.
Activist campaigns may view the current record lows in the financial markets as an opportune time to influence a company's actions and/or mitigate current shareholder losses, both in the short and long term.
Hostile Takeover Bids
Another risk with a severely depressed share price is the potential for opportunistic hostile takeover bids. Takeover bids are generally viewed as expensive and resource-intensive given the premium required to entice a sufficient number of shareholders to divest their interest; however, a number of industries have suffered heavy losses in recent weeks—transportation and energy in particular—and companies may be vulnerable to such bids. With interest rates in Canada and the United States continually lowering, companies that have sufficient capital resources to weather the current downturn may be looking to acquire other companies at a discounted value.
Recent Canadian Shareholder Activism Campaigns
Canada has seen a steady number of highly publicized and contentious proxy contests in 2018 and 2019. We have highlighted a few of these contests below:
- Detour Gold Corp.: In 2018, Paulson & Co. Inc. successfully launched an activist campaign arguing that the company was mismanaged and lacked proper board oversight. Paulson claimed that Detour Gold had been the worst performer relative to its peers since July 2016, and traded at a 47% discount to its reported net asset value. From July 2016 to September 2018, Detour Gold's share price had fallen from approximately $30 to $10.60. Paulson was successful in its campaign, electing a new slate of directors and appointing a new CEO.
- Hudbay Minerals Inc.: Also starting in 2018, Waterton Global Resource Management Inc. engaged in an activist campaign against Hudbay Minerals Inc. to replace the board of directors. It accused management of "massive value destruction and chronic underperformance", citing a decline in Hudbay's share price of approximately 44 percent from January 2018 to October 2018. The proxy battle ended in a settlement agreement between Hudbay and Waterton in May 2019, where the parties agreed on a slate of 11 directors.
- Crescent Point Energy Corp.: In May 2018, Crescent Point's management was faced with an activist campaign led by Cation Capital to replace four directors on Crescent Point's board. Cation claimed that over the course of 12 months, Crescent Point's shares had fallen approximately 47%, despite an 8% rise in the Canadian Energy Sector Index over the same period. While the company was successful in preventing Cation's proposed director slate from being elected, shareholders rejected a motion endorsing executive compensation.
Below are examples of strategic preparations companies should consider to defend against activist shareholders:
- Establish an activist defense team: Establish an internal team dedicated to dealing with activist shareholders and developing an immediate and comprehensive response to approaches by activists. This team will need to identify and respond to requests for shareholder lists, filings of early warning reports by major shareholders and other evidence of shareholder discontent. A company should also leverage its external financial, legal advisors to assist in defending its corporate strategy and objectives, and to coordinate coherent and timely responses to shareholders.
- Open shareholder communication: Management should be constantly monitoring its shareholder base, their objectives and investment strategies. It is important for a company to be able to respond to shareholders in a meaningful manner, address concerns and misinformation and ensure an open and transparent dialogue with its key shareholder base. Management should continue to treat its public disclosure as an opportunity to engage with shareholders and communicate results, strategy, objectives and opportunities in a clear manner to enhance shareholder confidence.
- High-quality corporate governance: Consult advisors to ensure corporate governance standards are frequently evaluated and strictly followed to prevent activists from exploiting weaknesses or inconsistencies.
- Understand trends in shareholder activism: Ensure management is aware of: (i) trends in shareholder proposals in Canada and the United States by staying up to date on recent proxy contests, and (ii) voting recommendations by proxy advisory firms and consider how to best comply with "best practices" guidelines.
- Use available legal defenses: Consider adopting: (i) provisions in corporate bylaws that require advance notice of any intention to propose nominees for directors (advance notice provisions will be vetted by proxy advisory firms such as ISS and Glass Lewis), and (ii) enhanced shareholder quorum provisions to increase quorum requirements for the percentage of outstanding shares required to be represented at a shareholder meeting.
If you have any questions regarding this article, please contact a member of the Bennett Jones Corporate Finance team. In addition, please visit our COVID-19 Resource Centre for other COVID-19-related materials.