Overview of Shareholder Activism in Canada in 2018 and 2019
In 2018, Canada saw 13 public proxy fights—the most since 2014.1 This prevalence of public proxy contests was coupled with a significant increase in “behind the scenes activism” in which activists privately advocate for change at the target company in an effort to reach an agreement without having to resort to publicly airing their grievances. For example, in May 2018, Element Financial Corporation (now Element Fleet Management Corp.) reconstituted its board as a result of agreements with some of the company’s largest shareholders and Element’s own assessment of its board composition. Also, on December 4, 2018, Cominar REIT announced a settlement with FrontFour Capital Group LLC, Westdale Construction Co. Limited, and K2 & Associates Investment Management Inc. to replace three members of Cominar’s board of trustees.
The trend of increased activism in Canada continues in 2019. To date, we have already seen 18 public proxy contests launched (13 board-related and 5 transaction-related), some of which are discussed below. In addition, based on our own activity and other anecdotal information, the number of quiet settlements appears to have increased once again this year. For example, on June 25, 2019, Sun Valley Gold LLC, a significant shareholder of Belo Sun Mining Corp., entered into an agreement pursuant to which it was agreed that, following Belo Sun’s AGM, two incumbent directors would resign, the board would be increased from five to six members, and three new independent directors would be added to the board to fill the vacancies.
In such an activism-heavy environment, it is critical for boards to be proactive. This is the case in Canada just as in the United States. It involves engaging with shareholders on a regular and ongoing basis, continually assessing areas of vulnerability (with respect to both board and management performance and that of the company as a whole), and having a plan in place for responding to an activist investor, should one emerge, in a manner that is appropriate for its circumstances. “Off-the-shelf” plans are not adequate replacements for bespoke strategies. Boards who understand their vulnerabilities and who their shareholders are and why they have chosen to invest will be best positioned to deal with activist demands.
The Activist-Friendly Nature of the Canadian Market
Canadian securities laws offer dissident shareholders a set of rules that allow significant flexibility in building a meaningful position in an issuer without public disclosure, soliciting proxies, and requisitioning shareholder meetings. These rules provide a generous framework within which potential activists may advocate for change at companies they believe are underperforming.
Unlike in the United States, where shareholders are required to file a 13D report upon acquisition of more than 5% of shares, the “early warning” system in Canada requires such disclosure only when a shareholder owns 10% or more of a company’s shares. Additionally, dissidents may “quietly” solicit up to 15 shareholders before filing and mailing proxy solicitation materials or convey their solicitation by public broadcast, speech, or publication. Further, shareholders with 5% ownership may requisition a meeting of shareholders to, among other actions, remove directors and nominate replacements.
These activist-friendly features undoubtedly play a role in creating an environment that is ripe for activism.
Key Trends in Canadian Shareholder Activism
In 2018 and 2019 to date, shareholder activism in Canada has been focused on the mining and energy sectors. Out of the 30 public contests that have taken place over this time frame, approximately 40% have occurred in the mining sector and almost 20% in the energy sector.
The mining sector has recently seen a number of highly publicized and contentious proxy contests, including the one between Detour Gold Corporation and US-based hedge fund Paulson & Co in 2018 (in which Paulson succeeded in replacing five out of eight of Detour’s board members) and the 2019 fights between Guyana Goldfields Inc. and a group of dissident shareholders led by the company’s former Executive Chair (which led to a settlement involving the replacement of two of Guyana’s incumbent directors and the departure of the company’s CEO) and between Hudbay Minerals Inc. and Waterton Global Resource Management, Inc. (which led to Hudbay nominating three of Waterton’s nominees for election to its board). Although not required by the settlement agreement, within months of the conclusion of the Hudbay/Waterton proxy context, Hudbay’s Chief Executive Officer resigned and was replaced (on an interim basis) by one of the Waterton nominees.
The energy sector also has seen significant proxy contest activity, including the 2018 campaign by Cation Capital Inc. to replace four directors at Crescent Point Energy Corp., an oil and gas company based in Calgary, Alberta. Although none of Cation’s nominees were elected, the proxy contest may have played some role in the resignation of Crescent Point’s CEO shortly afterwards. Another highly publicized fight played out earlier this year between TransAlta Corporation and activist shareholders, Bluescape Energy Partners and Mangrove Partners, who opposed a proposed strategic investment by Brookfield Renewable Partners. The activists threatened to launch a proxy contest to replace five of TransAlta’s directors in an effort to scuttle the deal but, likely recognizing that they would not win the contest, ultimately declined to do so and instead challenged the Brookfield transaction before Canadian securities regulators and in court.
Both the real estate and Canada’s burgeoning cannabis sectors also have attracted notable activist attention. Most of the real estate activist initiatives have been instigated by a single investor (Sandpiper Group). In 2017, Sandpiper won a proxy battle with the management of Granite REIT and successfully advocated, along with ELAD Canada Inc., for three nominees for the board of Agellan REIT (which was subsequently acquired in full by ELAD). In 2018, Sandpiper was granted a seat on the board of Artis REIT. Following these successes, in January 2019, Sandpiper announced it identified five publicly traded real estate entities it plans to actively pursue. It followed up on this announcement by successfully negotiating to have two of its nominees, including Sandpiper’s CEO, appointed to the board of Extendicare Inc. Most recently, a proposal by the Executive Chairman of Hudson’s Bay Company (which owns Saks Fifth Avenue and other department stores) to take the company private has come under heavy criticism by activist investors (including Land & Buildings Investment Management) who believe that the offer price is inadequate and does not properly recognize the value of the company’s significant real estate holdings.
In the cannabis industry, we already have seen two public contests in the first half of 2019. In April 2019, Ascent Industries Corp. reached an agreement with controlling activist shareholder Drew Malcolm pursuant to which all of Ascent’s directors were replaced. More recently, Marcato Capital Management LP, an investor in Acreage Holdings Inc., announced its opposition to a proposed transaction in which Canopy Growth Corp. acquired an option to purchase Acreage once the production and sale of cannabis becomes federally legal in the United States. Many observers anticipate that cannabis companies will be increasingly targeted by activists going forward, particularly if valuations continue to decline from their recent levels. The implosion of CannTrust Holdings Inc., whose trading price has fallen approximately 85% from the peak it achieved earlier in 2019 after the company disclosed significant regulatory violations, may well usher in the wave of activism in the industry that observers have been anticipating for some time.
Interestingly, in 2018 seven proxy contests were launched by former insiders, including the battles against DavidsTea Inc. by Rainy Day Investments Ltd. (controlled by co-founder and former director of DavidsTea, Herschel Segal) and Alexandria Minerals Corporation by Eric Owens (former CEO of the company). The DavidsTea contest resulted in an activist win, while the board of Alexandria Minerals was able to withstand the activists’ demands. The 2019 Guyana Goldfields proxy contest and the activities of a group of concerned shareholders of AIMIA were other examples of this trend.
Activists also are making increased use of social media in proxy battles. For example, during the recent contest between Knight Therapeutics and Medison Biotech, YouTube videos and Twitter feeds pointing to some of Knight’s deficiencies were released in favour of the dissident by an account titled “New Day for Knight.”
Canada continues to be an activist-friendly environment with a significant level of public and private activism campaigns. Increasingly, investors are raising their voices and articulating their concerns as owners of companies. We expect that the robust level of activist engagements will continue in 2019 and beyond. Canadian boards, like their counterparts in the United States, will be best prepared for the emergence of an activist investor by thinking like an activist and taking the time to engage in active preparation, focusing on ongoing shareholder engagement and undertaking a periodic examination and addressing of potential vulnerabilities.
- We thank the Shorecrest Group for their contribution to the 2018 and 2019 public proxy contest details and statistics referenced in this article.