With the recent election of seven nominees to the board of CP Rail, Bill Ackman and Pershing Square demonstrated in dramatic fashion that no Canadian company is immune from the rough-and-tumble world of proxy battles. Mason Capital also illustrated this recently with its successful opposition to the proposed share conversion of Telus Corp. Shareholder activism is clearly alive and well in Canada.
In light of the number of US activist investors that continue to look at target companies north of the border, and as part of the series of blogs for US investors that was recently launched by my colleagues Robert Hansen and Heidi Gordon, I thought it would be useful to take a quick look at the top 5 differences for activist shareholders in Canada as compared to the US:
1. Limited ability of target company to thwart hostile bid. An activist investor in Canada always has the ability to make an offer directly to a target company’s shareholders to acquire all of their shares pursuant to a take-over bid. Although a Canadian company can adopt a poison pill in an effort to inhibit a hostile bid, under current Canadian rules the pill will typically be struck down by our securities commissions a couple of months after a take-over bid is made. That is, the target’s board cannot “just say no” to a hostile bid. Which means the ability of target’s management to entrench itself in the face of shareholder dissent is significantly weakened.
2. No disclosure until 10%. A shareholder of a public company in Canada does not need to make public disclosure of its shareholdings unless it owns (together with any joint actors) 10% or more of the company. This is higher than the 5% disclosure threshold that applies in the US, and allows activist investors considerably more leeway to quietly acquire a meaningful stake in the target company.
3. Power to requisition meetings at 5%. Shareholders of a Canadian company that collectively hold 5% or more of the company’s shares have the power to requisition a meeting of shareholders at any time. Upon receiving a requisition, the board is obligated to call a meeting within 21 days (although Canadian courts will give the board latitude with respect to its choice of meeting date). As a result, an activist investor who holds 5% of the company has the power to launch a full-fledged proxy battle at any time. And because a larger percentage of Canadian companies have concentrated ownership as compared to the US, it is often easier for a dissident shareholder to round up a group of large shareholders who are dissatisfied with management.
4. No staggered boards. Shareholders of a Canadian company generally have the power to remove the full board of directors at any time. Accordingly, the board can be replaced in a single meeting with a dissident’s slate. The target company cannot rely on a “staggered” board to delay board change as is sometimes done in the US.
5. Oppression remedy. This is a remedy that allows shareholders of a Canadian company to seek recourse from the court for an almost unlimited array of unfair conduct by a company. If a shareholder’s “reasonable expectations” have been infringed by corporate action, the court has significant discretion to award a remedy. This gives shareholders a potent litigation tool to ensure that companies act fairly towards its shareholders, including in the course of a proxy battle.
In short, activist investors in Canada have a variety of rights and remedies that can create significant leverage for them in effecting change at a target company. Although the fiduciary duties of directors in Canada are conceived broadly (and permit the consideration of the interests of a variety of stakeholders), at the end of the day the board is fully answerable to the company’s shareholder base. The result is that a minority shareholder with a compelling vision – like Bill Ackman – can have a dramatic effect on the governance of even Canada’s most storied companies.