2013 saw a continuation of the growing trend of shareholder activism in Canada, with a number of high profile proxy battles and court decisions. Shareholders should be aware of the tools available to them to affect corporate decision-making, and issuers should consider what they can do to prepare for activism.

The Shareholder Activist’s Tool Belt
For a shareholder seeking to influence the direction of an issuer, a number of strategies are available:

1.  Increasing its equity position:

  • As the shareholder’s equity interest (and voting power) increases, so does its ability to engage the issuer’s board and management. The shareholder may informally influence the direction of the issuer or may be offered a nominee seat on the issuer’s board.
  • At the 10% equity interest level the shareholder will become subject to certain reporting requirements, and at the 20% level the shareholder will become subject to take-over bid rules.

2.  Submitting a shareholder proposal:

  • A shareholder can submit a proposal to raise any matter of business at an issuer’s shareholder meeting, and the issuer will have to include the proposal in its information circular as long as the proposal has been submitted before the applicable statutory deadline.
  • The shareholder must hold at least 5% of the issuer’s outstanding voting shares to submit a proposal to nominate any new directors (or, under the CBCA, at least 1% to submit any other proposal).

3.  Requisitioning a shareholder meeting:

  • A shareholder can requisition a shareholder meeting at any time.
  • The issuer will generally be required to call a meeting that is requisitioned unless a meeting date has already been fixed. In certain cases the shareholder can call the meeting if the issuer refuses.

4.  Engaging in a proxy battle:

  • A shareholder can solicit proxies to vote either for or against a matter of business at a shareholder meeting (including the election of directors). Proxy solicitation is normally undertaken by way of a dissident circular prepared at the shareholder’s expense, although public speeches or news releases may also be utilized.
  • A shareholder can obtain the list of the issuer’s registered shareholders and a list of non-objecting beneficial shareholders to assist with soliciting proxies.

5.  Acquiring Equity Control:

  • This may be achieved via a “friendly” negotiated transaction or by way of unsolicited take-over bid.
  • A 20% equity interest threshold triggers the formal take-over bid rules under Canadian securities laws (unless certain exemptions apply) and may also trigger an issuer’s shareholder rights plan.
  • Take-over bid rules impose a formal procedure, including the preparation of a take-over bid circular.

The Issuer’s Shareholder Activism Preparation Checklist
An issuer anticipating shareholder activism could consider taking some or all of the following steps as preventative measures:

1. Establish a response team / review investor relations activities:

  • An issuer should have a response team comprised of key members of senior management, legal advisers, financial advisers, a proxy solicitation firm, and a public relations firm, that can deal with shareholder issues on a timely basis and on short notice.
  • An investor relations group that is actively reaching out to key investors to communicate the issuer’s strategy and listening to investor feedback will allow the issuer to assess whether key shareholders are supporters or potential dissidents.

2. Monitor trading:

  • Monitoring trading of the issuer’s securities can help identify an activist accumulating a position.

3. Implement an advance notice and/or enhanced quorum bylaw:

  • An advance notice bylaw requires a dissident to give notice of its intention to nominate directors at the annual meeting, which serves to prevent an ambush from the floor.
  • An enhanced quorum bylaw imposes a higher quorum requirement where a shareholder proposes to replace a majority of the issuer’s board members.

4. Adopt a shareholder rights plan and review material contracts:

  • An issuer can adopt a shareholder rights plan to deter hostile change of control tactics.
  • An issuer should identify change of control or other provisions in material contracts that could be triggered upon the occurrence of certain activist shareholder tactics.

5. Review indemnification agreements and D&O policies:

  • An issuer should ensure appropriate indemnification agreements with directors and officers and D&O insurance policies are in place.

NOTE: This publication is intended to provide information to clients on recent developments in provincial and national law. Articles in this newsletter are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter.