The past decade has shown a large change within Canadian activism, and there is no sign of the change coming to a stop. If the past five years have shown anything it’s that Canadian market is on its way to rivaling the U.S., although multiple reasons stand in the way of Canada’s shareholder activism reaching it’s full potential.
We spoke with Fred R. Pletcher, a partner in the Securities and Capital Markets Group and Chair of the National Mining Group at Borden Ladner Gervais LLP. He advises public companies and underwriters in connection with a broad range of transactions and issues, including mergers and acquisitions, corporate finance, corporate governance, continuous disclosure and general commercial matters. Pletcher has considerable experience in the field of shareholder activism and also frequently advises boards of directors and special committees of public companies.
Christopher Skroupa: Why is the Canadian market still second to the U.S. in the prospect of increased shareholder activism?
Fred Pletcher: Part of it is familiarity, as Canada is an English-speaking country that borders the United States and shares the same time zones. Canada has a broadly similar legal and securities regulatory system to the United States, as well as similar attitudes and approaches towards corporate governance. Also there are many cross-border listed companies and a shared analyst community.
Another part of it is financial reasons. Due to the comparative strength of the U.S. dollar, a relatively undervalued Canadian resource sector over the past few years, and generally smaller market capitalizations of Canadian issuers which makes it easier for activists to accumulate an influential position. Part of it is Canada’s relatively weak structural defences against activism. Staggered boards are generally not permitted in Canada. Activists in Canada have the opportunity to accumulate up to a 10% position in a target before being required to disclose their ownership position – which is double that allowed in the U.S. under the 13D regime.
There is a comparatively lower 5% shareholding threshold in Canada for requisitioning shareholder meetings – other than in Quebec, where the threshold is 10%. Additionally, activists in Canada may solicit proxies from up to 15 shareholders, or by way of public broadcast, speech or publication without first circulating a dissident information circular. This gives activists a decided advantage over management in communicating with shareholders in the early stages of any contest to build support.
The Toronto Stock Exchange and the TSX Venture Exchange require listed companies to institute majority voting policies, which eliminates slate voting and which provides that for any director receiving 50% + 1 withheld votes at an annual meeting, those votes would be considered as votes “against” the director.
Finally, part of it is that the Canadian market is a comparatively target rich environment, due to a historically lower rate of activism than in the US. All of this makes Canada an attractive environment for US and other offshore shareholder activists to investigate.
Skroupa: What is the Canadian activism growth rate as compared to other markets?
Pletcher: Interestingly, the number of Canadian proxy contests declined in both 2016 and 2017, after reaching a high water mark in 2015. Activists were also decidedly less successful in the 2017 contests than in previous proxy seasons.
Much of this was due to a modest rebound in commodity prices in 2016, which strengthened the hand of management teams in the mining and oil and gas industries – which comprise a substantial portion of the Canadian capital markets. However, these declining numbers are also, in part, due to Canadian boards becoming more mature and sophisticated in their responses to activism.
While the instinct of Canadian boards several years ago was often simply to fight unwanted activism, today boards are more willing to explore the possibility of accommodating or acquiescing to reasonable activist demands. In our firm’s experience, this has led to an increasing number of private settlements with activists before things conflagrate into public confrontations or full-blown proxy fights.
So, the declining numbers of proxy fights in Canada is probably not an accurate metric to measure the overall level of activism in Canada. Activism in Canada has also been hampered somewhat by the relatively nascent state of home-grown activist funds in Canada. While there are activist funds in Canada, their numbers are small and those that do exists have considerably less capital at their disposal than their more established U.S. brethren.
Skroupa: How is the Canadian narrative different than U.S. in activism, and how is it different in activism engagement from the board and management perspective?
Pletcher: An important, if subtle, distinction between Canadian and US approaches to corporate governance that informs much of the traditional shareholder activism narrative is the fundamental question of to whom the board owes a duty.
The Supreme Court of Canada’s seminal 2010 decision, BCE Inc. v. 1976 Debentureholders, rejected the duty to maximize shareholder value in the context of change-of-control transactions – the so-called Revlon duty derived from Delaware jurisprudence. This was done in favor of a broad – albeit vague – duty to treat all affected stakeholders fairly, commensurate with “the corporation’s duties as a responsible citizen.”
The decision clarified that a board’s duty in Canada is to the corporation, and only to the corporation. Directors in Canada may, but are not required to, give consideration to the interests of a range of stakeholders, including shareholders, employees, suppliers, creditors, consumers, governments and the environment.
Accordingly, demands by activists to “maximize shareholder value” in the short term do not resonate as strongly in Canada as in the United States, and well-reasoned and fact-based appeals to “long termism” by management remain a robust defensive strategy in Canada.
Canadian shareholders also tend to be more instinctively deferential to incumbent boards and a management than U.S. shareholders – perhaps reflecting the same psychology that led Canadian loyalists not to rebel against the English crown during the American Revolution – which is reflected by Canadian management having a historically higher success rate in proxy contests against activists than the U.S. experience.
Conversely, activists campaigns to change only a minority of an incumbent board receive greater support in Canada than campaigns to unseat a majority of the board. Of course, activists can also employ this deference to their advantage, as activist campaigns in Canada spearheaded by former founders or CEOs of the target have a much higher incidence of success than campaigns by unrelated third party activists.
One final corporate cultural distinction across the 49th parallel, which is pertinent to much shareholder activism, is that CEO and senior officer salaries in Canada are, on average, well below those in the United States. Thus, executive compensation concerns that might be considered modest in the United States, may well be considered egregious by Canadian shareholders.
Skroupa: What does activism mean in the resource base from a Canadian perspective?
Pletcher: The temporary derailing of Exxonmobil’s $2.5 billion acquisition of InterOil and Elliott Management’s accumulation of a 5% position and push for change in BHP, the world’s second largest mining company, have been something of a wake-up call to the Canadian resource sector that any transaction and any size of issuer can be susceptible to a challenge from activists.
The sector, however, is still largely insulated by the fact that even modest commodity price movements will have a share price impact that overwhelms any gains that can be generated through the typical activist playbook. This has led some resource issuers, particularly among the mid-tiers and juniors, to mistake the sector’s inbuilt structural resilience against activism for shareholder support of their specific strategies and operating results.
Accordingly, there tend to be more laggards among mid-tier and junior resource issuers on issues of corporate governance, shareholder engagement and tying strategy to long-term share performance than is the case among public companies in other sectors in Canada. Board diversity and tenure issues also are often challenges in these industries.
Interestingly, Canadian resource companies’ share prices have lagged commodity price increases in 2017, which suggests that there may be opportunities for activists to try and bridge this performance gap.
Skroupa: What’s the difference between activism in Canada five years ago and today?
Pletcher: The differences are really night and day. Five years ago corporate Canada was reeling from the unexpected success of Pershing Square’s six month battle with the board of CP Rail, one of Canada’s blue chip issuers. It was a watershed event for activism in Canada.
As a result, the sentiment in Canada’s boardrooms changed from a dismissive “it can’t happen here” to an urgent “how do we stop it from happening here?” Since then a majority of Canadian issuers have adopted some basic structural defenses against being ambushed by activists at an annual meetings, through the adoption of “advance notice” bylaws and policies. These provisions require activists to provide notice to the corporation if they wish to propose nominees to the board of directors at an annual meeting of shareholders.
The length of notice varies, but shareholders are generally required to notify the corporation of proposed nominees 30 to 65 days prior to the annual meeting. The notice must include information about the nominator and the individuals being nominated which is similar to the information that is required to be disclosed in a dissident proxy circular. As a result, surprise nominations of activist directors from the floor of AGMs in Canada have become a thing of the past
Executive compensation practices in Canada have also come a long way. Public disclosure on compensation practices has improved immensely, with many organizations pushing the “plain language” beyond text to a “show and tell” model. The link between corporate strategy and executive compensation is better communicated, as is the board’s role in designing executive compensation.
And generally, executive compensation in Canada has become more weighted to long-term performance. While say-on-pay votes in Canada remain voluntary, participation rates among Canadian companies continue to increase.
Say-on-pay votes were held by 177 Canadian companies in 2016, compared with 157 in 2015 and 28 in 2010. In the few instances where say-on-pay were defeated, such as Barrick in 2013 and 2015; CIBC in 2015 and in 2016, changes to compensation structure were made in response. These developments have blunted the typical activist complaint of management overcompensation.
There has also been a sea change over the last few years in the degree of constructive engagement between board of directors and shareholders in Canada. While such direct engagement was once a rarity, it is now regular and frequent for many issuers. Organizations like the Canadian Coalition for Good Governance have even issued a model policy on shareholder engagement. This level of engagement has improved accountability and in some cases inoculated issuers against activists’ claims of ignoring shareholder concerns.
Skroupa: What trends do you see in activism in the near and distant future for Canada?
Pletcher: Firstly, as shareholder activism has evolved from a niche strategy pursued by a limited number of high-profile hedge funds to a widely accepted investing approach employed by institutional investors and hedge funds alike on a global basis, I’d suggest that both the management and activist sides in Canada have become more sophisticated in dealing with one another. It’s unlikely in 2018 and beyond that an activist investor or a larger Canadian target company will be unprepared for any given campaign.
So, I would expect to see more settlements of activist challenges without proxy fights among Canada’s senior issuers, while proxy fights will remain concentrated in the junior to mid-tier end of the Canadian markets, where there less experience and sophistication in dealing with activists persists.
While corporate governance and executive compensation has been a focus of activism in Canada for some time, I suspect that increased attention will be paid by activists to environmental and corporate social responsibility – known as CSR – issues going forward. Given the wild gyrations in share price for Canadian issuers which have faced environmental and CSR challenges in 2017.
For example, the suspension of the operating license for Tahoe Resources’ Escobal mine in Guatemala, recurring disputes between Centerra Gold and the government of the Kyrgyz republic, Eldorado Gold’s continued permitting disputes with the government of Greece and the British Columbia Government’s decision to oppose Kinder Morgan’s expansion of the Trans-Mountain pipeline.
M&A focused activism in Canada also is likely to increase in the wake of the Yukon Court of Appeal and Supreme Court decisions in InterOil Corporation v. Mulacek, which have considerably raised the procedural bar that boards must meet to conclude friendly business combinations
Finally, as a matter of proxy fight tactics, the use of private placements to direct additional shares into the hands of friendly subscribers as a defensive tactic in proxy contests in Canada is likely to decline as a result of the Ontario Securities Commission’s decision in the spring of 2017 to intervene and reverse a private placement by Eco Oro Minerals Corp. before a contested shareholders’ meeting.
Pletcher will be giving a presentation entitled Effective Tips and Techniques: How Canadian Managers Have Successfully Responded to Activism at the Global Shareholder Engagement & Activism program in Toronto, Canada on Sept. 28-29.