Jonathan Feldman is a partner at Goodmans. His practice focuses on corporate and securities law with an emphasis on mergers and acquisitions. Jonathan has extensive experience acting for buyers and sellers in a wide range of industries for private and public companies. He has been involved in a number of contested shareholder matters, including proxy contests representing both dissident shareholders and boards of directors. He is also often asked to participate in litigation matters where strategic advice is sought and knowledge of corporate and securities law is required. Jonathan has been a frequent author and lecturer on topics including recent developments in the Canadian M&A market, the evolving role of shareholder rights plans and the rise of shareholder activism in Canada. He has also served as an Adjunct Professor at the University of Toronto Law School where he has taught the course “The Art of the Deal.”
Christopher P. Skroupa: How do Canadian activist practices differ from those in the United States?
Jonathan Feldman: For many reasons, Canada is much more “activist friendly” than the United States, particularly due to significantly different standards and regulations involved in the investment industry.
For example, “early warning” reporting is not required until the 10% threshold has been reached. Canada has an “early warning” disclosure system similar to 13D reporting requirements in the U.S., however, in contrast to the 13D regime, reporting is not required until the acquisition of ownership or control (individually or with joint actors) of 10% or more of the outstanding equity securities of any class on a partially diluted basis (reduced to 5% when a takeover bid is in progress). Upon reaching the 10% threshold, an investor is required to immediately issue a press release disclosing, among other things, its identity, ownership position and investment intent. In addition, an “early warning report” containing similar information must be filed with Canadian securities regulators within two business days.
The requirement to mail a dissident proxy circular does not apply where the solicitation is limited to 15 or fewer shareholders or if the solicitation is conveyed by public broadcast, speech or publication and where the solicitation contains certain prescribed information. These two exceptions give activists an ability to communicate with shareholders both quietly (to build support) and less expensively (so they don’t have to mail a proxy circular) than companies.
Activists can also requisition special meetings of shareholders because shareholder requisition is a statutory right in Canada. The holders of not less than 5% of the issued voting shares (other than in Quebec, where the threshold is 10%) have the right to requisition the directors to call a meeting of the company’s shareholders for the purposes stated in the requisition, which can include the removal of any or all of the directors and the nomination of replacements. Shareholders’ ability to replace all directors at any shareholder meeting makes staggered boards ineffective. The target board of directors will generally be required to call a shareholder meeting in response to a valid requisition within 21 days of receiving the requisition but (other than under B.C. law, which requires that a requisitioned meeting be held within four months of the requisition) there are no specific legislative requirements as to when the requisitioned meeting must occur. If the target board refuses to call the meeting or picks a meeting date that involves an unreasonable delay, the requisitioning shareholder may apply to court for an order calling the meeting or forcing the meeting to be held at an earlier date. The timing of a requisitioned meeting is something is often fought over in contentious campaigns.
Another major difference between Canadian and American activists are their inability to “just say no.” Poison pills are generally accepted in Canada and until recently, were commonly employed in response to unsolicited takeover bids. However, unlike in the United States, poison pills in Canada have not been used to “just say no” to an unsolicited offer. Poison pills are also used as a day-to-day protection against “creeping” take-over bids—i.e., preventing shareholders from using the private agreement exemption (or other exemptions from the formal bid requirements) to acquire more than 20% of the outstanding shares without making a formal bid to all shareholders.
In 2016, Canadian securities regulators adopted new rules to the takeover bid regime whereby, among other things, all bids must remain open for a period of at least 105 days unless abridged by the target board, at least 50% of all outstanding target shares (other than those held by the bidder) must be tendered before a bidder can take up any securities under the bid and if the majority tender condition is satisfied, the bid must be extended for an extra 10 days to allow additional “follow on” tenders. As a result of these new rules, there will generally no longer be any need for target companies to use poison pills in response to a hostile bid.
Skroupa: In your experience, has there been an increase in prospective activist campaigns from overseas in Canada? What is the likelihood of seeing an increase in cross-jurisdictional activist campaigns?
Feldman: As a result of the significant structural advantages available to activist shareholders in Canada, there is a significant amount of international interest in cross-jurisdictional activist campaigns. I recently spoke with a group of U.K.- and European- based hedge funds that are looking to deploy capital abroad and have shown a particular interest in Canada. The majority of the activist campaigns that I have run or helped defend against to date have been from U.S. based hedge funds, which still represents the largest inbound activist activity. There is also a small but growing group of homegrown activist hedge funds in Canada but I think the majority of activity, at least in the short term, will continue to come from off shore interest.
These campaigns require a very delicate and nuanced touch since the first and most obvious vulnerability relate to the narrative around the “short term outsider” trying to “ruin yet another Canadian company.” At this point the market has become quite sophisticated and can generally see through this rhetoric, provided that the activist plans a very careful and well thought out campaign that reflects ideas that are viewed to be in the best interest of the company and its shareholders.
Skroupa: How will the Trump presidency affect shareholder activist campaigns between U.S. and Canadian companies?
Feldman: I don’t expect there to be any material difference during the Trump presidency—Canada remains open for business. Our regulatory regimes are relatively straightforward, which I don’t expect to change in any major way. For instance, the acquisition of 33.3%-plus of the voting shares of a public company that carries on a business in Canada by a non-Canadian could trigger notification/review requirements under the Investment Canada Act. Also, companies operating in certain regulated industries (e.g., telecommunications, broadcasting and insurance) are subject to statutory limits on foreign ownership.
Skroupa: What role do international activist campaigns play in the global marketplace?
Feldman: What the role of activist campaigns is in general is a question without any easy answers. At a very high level, at one extreme, some view these campaigns as being run by opportunistic short-term investors who have no regard for the companies in which they invest, whereas others view these campaigns almost as a “public good” that provide the best discipline on otherwise unaccountable boards. Clearly, the answer lies somewhere in the middle and is largely a function of the purpose driving the campaign and the end result.
These campaigns are always expensive and time consuming but are often necessary to properly change the course of company that is in its long-term interest and that of its shareholders. Activism is global phenomenon and more and more players in the space are realizing the attractiveness of Canada as county in which to invest and to engage in these campaigns. The degree to which activists succeed is often a function of both understanding the nuances that exist “north of the border” and, as in all campaigns, effectively articulating a vision that is viewed as being in the best interest of the company and all of its stakeholders.