Jon Feldman, partner at Goodmans LLP, discusses the state of shareholder activism in Canada following a banner year, and delves into what’s top-of-mind for him as we head into the 2024 proxy season.
Q: What is the current state of shareholder activism in Canada? What trends are you seeing?
It's been an incredibly busy year in shareholder activism, and it kicked off at the very beginning of January. It’s one of the most active years I've seen in over 10 years of doing this, both in terms of traditional proxy contests, starting with First Capital, and a surge in M&A activism, which we haven't seen in the Canadian market: it’s pretty typical in the US but a new phenomenon in Canada. We’re seeing much more scrutiny on every deal that gets announced, which is certainly a change. Companies announcing deals right now should assume, or at least prepare for, the potential involvement of activist shareholders looking to challenge or alter the deal terms and should structure their deals in a way that can withstand an activist campaign.
We have also been involved on both sides of a number of ‘vote no’ campaigns where activists are trying their luck with the new majority voting standard for CBCA companies that came into effect just prior to this year’s proxy season.
In general, I would say that activism is certainly in fashion these days, and based on what we're seeing right now in “requisition season” (the time where shareholders consider requisitioning special meetings as opposed to waiting for the AGM), there is a strong pipeline building. It remains to be seen how many of these potential fights will become public or if they can get settled quietly and behind the scenes.
Q: What are the trends or key challenges you’re keeping an eye on?
It's important to note that, unlike in the US, in Canada those who work in the activism space represent both companies and activists. At any given time, we can be representing one side or the other, and that experience and insight informs what we do, how we look at the situation, and what we think about. Canada is viewed as a very activist-friendly jurisdiction, and one reason for that is the ability of shareholders to requisition a special meeting for the purpose of removing and replacing directors. That said, there has been a shift in power trending over to the management side, arguably to the point where it's starting to get considerably favorable to management, and that is requiring potentially some course correction. What I mean by that is, management typically controls the timing of the meeting; management has an information advantage; and management can use the company treasury to thwart an activist because they have the ability to — on sometimes questionable grounds — reject a shareholder requisition or a nomination for advance notice. These tactics (that I have used myself and have had to encounter) forces an activist to take certain action, potentially going to court or a regulator spending their own money and in some cases, having a material impact on their overall returns, whereas the company is playing with “house money”.
When we look at it objectively, we’d rather see something more down the middle and there's an example of that in the First Capital case. Often times a shareholder gets their 5% and requisitions a meeting, typically for the purpose of removing and replacing directors, and the board has 21 days to respond. If the board doesn't respond, the shareholder can call the meeting. But, quite frequently, a shareholder will requisition a meeting and somewhere between day 14-20 the company writes back to say there's a “deficiency in the requisition”, please resubmit — and that arguably restarts the 21-day clock. The company plays that game, and the shareholder must make a tactical decision whether to respond or go to court. Normally shareholders understand that they will be required to resubmit and eventually, after one or two more times, the company will call the meeting but set it for up to six months down the road. The general consensus is that, after the shareholder’s requisition is finally accepted, the meeting will happen within four to six months. Companies have historically been able to take as much time as they want, unless, of course, they're challenged by the activist, which is what happened in the First Capital fight. The court ordered the REIT to hold the meeting much sooner. In that example, activists used the court to mitigate the power imbalance with management — but that’s only one example. There are different tools that companies use that give them a tactical advantage in these fights, and unless activists are prepared to spend the money, management has a number of advantages when it comes to controlling the timing, the process, and the plans of meeting requisitions.
Another example of management advantage is reviewing proxies. In the US, there is no information asymmetry: the proxy circulars go out, and the activist and the company both know what the vote looks like coming into the meeting. In Canada, there’s a proxy cut-off time, usually two business days before the meeting, and contested meetings are typically held on Tuesdays, meaning the cut-off is Thursday evening or Friday morning. The dissident knows what support it has but ít doesn't know what support the company has. But by the proxy cut-off time, the company has all of the votes and knows the outcome. Remember – we never get 100% turn out at these meetings so the denominator is those who actually voted. Over the weekend, the company can ask shareholders to retract their votes, it can waive the proxy cut-off to get more votes in, and it can try to negotiate a settlement using the information imbalance to its advantage. It also might not let the dissident review their proxies until after the meeting, at which point it's a little late to go to court, unless you’re up for challenging the results of an election that’s already happened.
One last example is advance notice provisions. Advance notice bylaws or policies exist to avoid a situation where shareholders ambush a meeting. The court in Partners REIT v. Orange Capital basically said that advance notice provisions can be used as a shield, not a sword. So in Canada they can be used for the purpose of having orderly meetings, but they can't be used by a company to thwart a shareholder’s right to nominate directors. In the US, if there's even the slightest mistake — for example, we were told about a situation where somebody got one ZIP Code wrong — the entire nomination can be thrown out for being incorrect. And that notion is creeping into Canada. We were involved in a proxy fight earlier this year where that tactic was used, though ultimately it settled.
So there are tactics available to management to really make things challenging, legally, for activists. The question becomes, where is the market going when it comes to regulating these fights? It would take a lot of work on the part of securities regulators to change the rules, but right now there certainly is an imbalance in favor of management. That could be a good thing, it could be a bad thing depending on the day and depending on the file you're working on, but that seems to be where things are moving.
Q: Have there been any notable regulatory or legislative changes?
There was a major change with majority voting, which is something I've seen evolve over the last 10 years. In 2014, the TSX came up with rules requiring any TSX-listed issuer to have a majority voting policy in place. In uncontested meetings, if a director nominee gets more WITHHOLD votes than FOR votes, that director needs to tender his or her resignation and within 90 days the board has to accept it or not. At first, some directors who received less than the majority of FOR votes tendered their resignations and the board said, you know what we need you. In 2017, the TSX got tougher and said there has to be very unusual circumstances where the resignation is not accepted. Fast forward to this year, and the CBCA created a majority voting requirement: any public company that is a CBCA company, whether they're TSX, TSXV or CSE, has a majority voting standard in uncontested elections. The idea is that, if you're not elected by the majority, you shouldn't serve, and it took years of work to get to that point.
That’s relevant for the purpose of proxy contests because shareholders are allowed to engage in what we refer to as ‘vote no’ or ‘withhold the vote’ campaigns. Instead of spending money to requisition a meeting or to issue a proxy circular, shareholders can communicate publicly about why they aren’t voting for a director, or publicly solicit other shareholders (using the public broadcast solicitation right) to vote against a director. It’s a mechanism to remove directors or to gain leverage to negotiate changes in the board or changes in strategy that doesn’t cost shareholders very much as compared to a full blown proxy campaign. That’s a regulatory change I believe the Canadian Coalition for Good Governance (CCGG) strongly supports, and I think ISS and Glass Lewis like it as well because it brings accountability and allows shareholders to voice issues.
It's very early days, but there will be more ‘vote no’ campaigns and the question will be, what’s the response of management as a result of this regulatory change? We don't really know yet, but that's something we're keeping an eye on, for sure.
Q: What are you preparing for in the 2024 proxy season?
We’re preparing for more of the same. Almost every sector right now is vulnerable to activists. Stocks are trading somewhat lower than what people believe to be full value, and a lot of activists are running screens to see where the vulnerabilities lie – whether it's in real estate, retail, or technology. We’re starting to talk to our company clients about getting prepared for this: ensuring they speak to their shareholders and do their own vulnerability analysis to identify the obvious issues that activists might identify. Interestingly, one of the typical activist tactics when there's excess cash on the balance sheet is to demand a share buyback or a special dividend or something to put cash in the hands of shareholders. But there's a new tax coming into effect in Canada in 2024 that will tax share buybacks, so I wonder what impact that will have on that strategy on a go-forward basis. It will be less tax efficient to engage in share buybacks come January 1.
Q: How is Goodmans uniquely positioned to manage shareholder rights and activism mandates?
We've been involved in pretty much every major proxy contest over the last few years, including cross-border contests engaging both US and Canadian rules. We have a unique skillset there —very few firms do this on a regular basis — and we have great relationships with all the players, both in Canada and in the US. We have a good grasp of the market, know the push points, and are very effective in reaching negotiated settlements. Because we work for both activist and company, we have a good perspective on what the other side is thinking which helps get us to the middle a lot more quickly.
We have a deep bench of both corporate lawyers and litigators and have very good relationships with the regulators so we understand the way they think and we understand the issues. We add value to our clients — we’re often asked to match the right experts with the right clients — and get them what they want while spending as little money as possible. We make these fights as painless and quick as we possibly can and we’re well known in the space. Due to our extensive expertise and experience, we have become highly sought-after speakers at various conferences and industry-related events in the US, where we discuss Canadian activism. Recently, I had the opportunity to address a distinguished audience in Palm Beach, and will be speaking at Bloomberg’s Activism Forum 2023 next month in New York. We also recently hosted an event at Goodmans in collaboration with Gagnier Communications, a prominent US-based PR firm specializing in this field.
Simply put, it's our expertise, our experience in court, our relationships, our cross-border knowledge, and just our long history of doing this work. Steve Halperin is the dean of M&A and shareholder activism in Canada. He's been doing this for over 40 years and he's still at Goodmans.
Q: Any final thoughts?
Shareholder activism is complicated — it's important to have a really strong team of people that know what they're doing. As a company you’ve got to think like an activist, and as an activist you’ve got to think like a company to figure out what the key issues are.
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Jon Feldman is a partner and heads a business law group at Goodmans LLP. His practice focuses on corporate and securities law with an emphasis on mergers and acquisitions. Jon has extensive experience acting for buyers and sellers in a wide range of industries in both private and public M&A transactions and is involved in some of the most high-profile proxy contests in Canada representing both dissident shareholders and boards of directors.