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The Canada market has always been an easy target for activists, but now boards are fighting back.

Shareholder activism is expanding across the globe after its rebirth in the US during the ‘80s. Since that time, shareholder activism has reached all corners of the globe from Canada, to Europe and many parts of Asia.

Like an unfurling wildfire in the dry season of California, shareholder activism is rapidly changing in the cross-jurisdictional market, where the local rules vary from region to region.

We spoke with Victor Guo, an expert who understands the evolution and rise of shareholder activism, and the direction it’s heading globally.

Guo, Executive Vice President of Governance Special Situations, Kingsdale Advisors, is a veteran in corporate governance advisory with special focus on shareholder activism and contested situations. Prior to joining Kingsdale, Guo was Vice President of M&A and Proxy Contest Research for both of Institutional Shareholder Services Inc.’s US and Canadian research teams.

During that time, he covered and provided vote recommendations for over 80 North American proxy contests as well as more than 1000 M&A transactions to institutional clients during his 5-year tenure at ISS.


Christopher P. Skroupa: In the broader global perspective, what can one expect see to in future of activism? Where is activism going?

Victor Guo: Shareholder activism is clearly expanding. Whereas the US has the highest number of proxy contests across the globe, shareholder activism in other parts of the world is also booming.

For example, the landscape in Asian markets is changing as selective US funds have been making progress, and creating an impact in Asia such as Third Point and Elliott.

One needs to be aware of the different dynamics and nuances in political – as well as regulatory regimes – between markets before even thinking about launching an activism campaign. It may sound ludicrous from the perspective of some market participants, for instance, to target a publicly listed state enterprise for shareholder activism for obvious reasons.

 

The other thing is that, whereas in North America, shareholders are generally held at the top of mind of management, business leaders in other regions may hold a different view. As Jack Ma of Alibaba Group Holdings said:

“It’s customers number one, employees two and shareholders three. It’s the customer who pay us the money, it’s the employees who drive the vision and it’s the shareholders who, when the [financial] crisis comes, ran away. My customers and my people stayed.

We normally use the term “cultural shock” when someone travels to foreign countries and he or she is struggling adapting to local customs, this could also apply to shareholder activism. But, where is activism going?

The short answer is that it is getting more and more diversified, both vertically and horizontally, as well as strategically and regionally. Bottom line is that one has to understand the game rules of the local market before taking any actions. It may be prudent to observe and adapt first and then to act.

 

Skroupa: Why are activists going to outside regions for campaigns and markets? How can they broaden their strategy to reach other markets?

Guo: The biggest rationale behind [outside regional campaigns] may come largely from the need for diversification. It makes sense, especially for certain markets that are highly concentrated in a few sectors, such as Canada, whose market is largely attributed to natural resources and financial sectors.

To get exposure in other high quality sectors which the domestic market may not be in a good position to offer, it is natural to see investors to go abroad. Accordingly, if they are not happy with their investments as investors in outside markets for whatever reasons, activism will kick in.

For example, investors should understand activism in North America will be quite different from that in Asia. The aggressive US “hedge fund style” approach may not be working – at all – in Asian markets. In those markets shareholder democracy, as well as the corporate governance regime, may not resonate the same way as it does in North American markets. Ergo, activists may find themselves in a better position by using a less confrontational approach.

It is worth noting that more advanced tools such as proxy access, are not widely available in most of the markets. In addition, the bar of requisitioning a shareholder meeting could vary significantly among different countries.

Lastly, understanding the by-law of companies in different markets would be also critical before contemplating an activist campaign. A classic example would be the advance notice by-law, whereas it shares the same terminology name in both the US and Canada, the provisions contained therein could differ considerably between the two markets.

Skroupa: How are the rules in cross-jurisdictional activism changing? What are the risks to the direction activism is heading?

Guo: Cross-jurisdictional activism is evolving, and getting more dynamic. When a US hedge fund comes to Canada to target a Canadian company, it is not surprising that normally there is a local advisory group working behind the scenes.

The hedge fund may be an expert on crunching numbers and ready to criticize the valuation gap between what the company is trading at and its intrinsic value. However, it absolutely does not want to be tripped by any legal or governance traps when the campaign is set to go.

An analogy may be a native guide helping the sophisticated adventurer navigate through an unknown jungle to figure out the correct route. The direct risk of such approach could be the increasing costs to run an activist campaign, but such risk may also force foreign activists to thoroughly contemplate the approach before making a move, thereby improving the overall quality of the campaigns.

Therefore, when issuers see a foreign activist at the door, especially a credible one, the level of pressure could be potentially higher than facing a local activist, as the well prepared foreign activist is very likely unwilling to travel so far and come back with empty hands.

The other important thing for foreign activists to understand is the behavior of a local shareholder base, both institutional and retail. For example, in some countries, institutions may be more open to activism than those in other markets, whereas in some other markets, they may tend to by default vote with management.

Sometimes the implication can go well beyond the norms; recall that Korea Investment Corporation asked Elliott Management to refrain from investing in Korean-based businesses following Elliott’s losing proxy fight involving Samsung’s controlling Lee family, and the former even indicated that it might pull its investment away from Elliott if Elliott continues to act against the national interests of Korea.

 

Skroupa: What about the Canadian market is drawing in activists?

Guo: Canada is famous for being known as the promised land for shareholder activism. There are three main shareholder friendly reasons:

  • As per the Canada Business Corporations Act, the holders of not less than 5% of the issued shares of a corporation, that carry the right to vote at a meeting sought to be held, may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition;
  • The trigger for the early warning reporting requirement is the accumulation of 10% of the voting or equity securities of a reporting issuer, twice the US level;
  • Shareholders are allowed to solicit proxies to 15 or fewer shareholders privately, or/and by way of public broadcast, speech or publication, not necessarily through a dissident circular, which may appear appealing to run a proxy contest from the perspective of costs.

Because of how appealing Canada is, Canadian boards have become adept at dealing with activist advances. This means activists need to make sure they have equally experienced advisors at their disposal.

Besides settlements, when we talk about the proxy campaigns that do go to a vote in Canada, Canadian boards have become effective in defeating activists at the ballot box.

For proxy battles that actually went for a vote, the dissident win rate had been in freefall from 2013 until 2016, from more than majority to only 14%, according to ISS data.

However, this year we have started to see the trend reverse, and so far the dissidents have been winning over management in terms of public campaigns that have gone to the voting stage, not to mention any halfway settlements.

The knee-jerk reaction would be that if investors see that dissidents are starting to have a better shot at Canadian companies again, some of the investors may start to rethink about the option of launching an activist campaign if they believe that the company is in a dire need for change, given that the reimbursement of dissident expenses is also treated favorably in Canada.

 

Skroupa: Since the focus is on the Canadian market, what does this mean for proxy fought between local and foreign activists? How is the Canadian market supporting its own, but drawing in new activists?

Guo: Despite being either local or foreign investors, as long as the investors understand the rules of the Canadian market, and the companies they want to target well, they should be equally successful. That being said, one point that may work against foreign activists may be in relates to their credibility.

Management, as well as other shareholders, may have a hard time understanding their track record and more importantly whether the foreign activists will really be more capable of making necessary changes and creating sustainable shareholder value.

For the local activists who’ve already established their image in the market, they may have slight advantages over their foreign counterparts in that they may have some benefits such as doing more personal visits/face to face talks with management and the board, which overall may help increase their chance of getting a settlement deal in certain cases.

The Canadian market certainly does not discriminate between local and foreign activists. We have seen US activists having run really successful campaigns in Canada and created tremendous shareholder value, such as Pershing Square/CP.

We also have seen local Canadian activists had difficult time in fighting against Canadian boards. The market factor here normally does not matter that much. At the end of the day, it is the business plan and quality of dissident nominees that will play much more critical roles in determining the final outcome of campaigns.


Guo was the Canadian M&A lead for ISS Canada where he assembled and trained the ISS Canadian M&A research team. Prior to ISS, Guo had worked in both investment banking and economic consulting.

Guo holds an MBA in Finance and Blue Ocean Strategy from INSEAD and a Bachelor of Commerce degree (Double Specialist in Commerce & Finance and Economics, Minor in Mathematics) from the Rotman School of Management at the University of Toronto. He is a CFA charterholder.

Kingsdale Advisors is the Executive Lead Sponsor for our Global Shareholder Engagement & Activism Summit in Toronto Canada on Sept. 28-29. Guo, along with others from Kingsdale Advisors, will be speaking at the summit on various topics relating to shareholder engagement and activism.