Rise in Canadian shareholder activism faces test next month with new rules in place

The moon rises behind the skyline and financial district of Toronto
The moon rises behind the skyline and financial district of Toronto on November 25, 2015.

A recent surge in shareholder activism in Canada will face a reality check next month, when a new law that gives investors more powers to choose board nominees is put to the test and could spur more campaigns this year, lawyers say.

Canada is a perfect environment for activists with advantageous regulatory rules, but it has failed to attract large groups of activists to its shores.

The country has lagged behind the rising trend of activism seen globally, but that may be about to change, advocates say. About 53 Canadian companies faced activism campaigns in 2022, up 17.8% year-on-year, compared with a 10.6% rise in the U.S. to 511, showed data from Insightia, a Diligent brand.

Last August, Canada changed federal laws that allow investors to vote ‘for’ or ‘against’ each director appointed to a company’s board. Previously, shareholders could only vote ‘for’ a candidate or ‘withhold’ their vote, meaning that a majority was not legally required.

Although not enshrined in law, majority voting was often adopted by companies in their policy prior to the change. But the directors previously faced no legal requirement to step down if they didn’t get a majority of “yes” votes, lawyers said.

“If I were an activist, it would make things easier,” said Heidi Reinhart, partner at Norton Rose Fulbright.

Reinhart said that if an investor now calls a ‘against’ campaign and gets enough votes, the person will not be elected. “So I think there will be more targeted campaigns against specific directors. That gives a shareholder some leverage,” added Reinhart.

Although the rule change took place in August, lawyers point out that this is the first proxy season in which the amendment will be tested.

Next month, in activist campaigns by Luxor Capital Group and Sandpiper Group against Ritchie Bros Auctioneers and First Capital Real Estate Investment Trust (REIT), respectively, both will face scrutiny from other investors.

Luxor opposes Ritchie Bros’ acquisition of IAA Inc for $6 billion, while Sandpiper aims to overhaul First Capital REIT’s board.

Activist hedge funds are likely to be further emboldened after bets on M&A deals globally netted them a whopping 8.5% gain in January, making them the top performing strategy for the month after losing 17 .23% on average in 2022, showed data from Hedge Fund Pesquisar.

When it comes to wins and losses, however, only 22% of demands from public activists in Canada were at least partially met in 2022, down from 26% in the US and 34.1% in Europe, according to Insightia.

Canadian campaigns have been more successful in the previous four years, with a rate of 34% in 2021 and 43% in 2018.

An increase in activism is expected to not only increase business transparency, but also boost stock performance.

In the case of Elliott Investment Management calling for a strategic review and changes to the board of Suncor Energy Inc, for example, shares are up 56% since the activist announced his involvement in April.

On the other hand, Canadian energy stocks rose 3.14% over the same period.

And oil and mining companies may remain the sector facing activism, market participants say.

“There are a lot of resource companies and those sectors often face displacement and it’s often people facing challenges in their businesses,” said Adam Givertz, partner at law firm Paul Weiss.

“These challenges, if kept in good company, can grab an activist’s attention.”

Buildings are seen in the financial district of Toronto
Buildings are seen in Toronto’s financial district on January 28, 2013.

Leave a Reply

Your email address will not be published. Required fields are marked *