1. OverviewShareholder activism is firmly entrenched in theCanadian corporate landscape, and Canada has provenfertile ground for dissidents. This guide provides aconcise but comprehensive overview of key tacticsand related legal issues fundamental to shareholderactivism in Canada.We begin by reviewing four critical issues applicable toactivist stake-building and shareholder engagement.We next consider the offensive tactics available to anactivist under Canadian law. We then consider potentialtarget defensive strategies and other responses to adissident campaign. This is followed by a review of howan activist may counter such target defensive tactics.We conclude with various additional legal issues forboth targets and activists to consider.Shareholder activism in Canada raisesnumerous and varied legal issues under bothcorporate law and securities law. Whetherconducting or defending against an activistcampaign, foresight, preparation andresponsiveness are imperative.
2. Stake-Buildingand ShareholderEngagementAny shareholder considering commencing an activistcampaign or engaging with an activist or potentialactivist should carefully navigate relevant securitieslaw and corporate law regarding (1) stake-buildingand public disclosure, (2) acting jointly or in concert,(3) insider trading and tipping, and (4) the solicitationof proxies. Conversely, public issuers the subject ofan activist campaign or potential activist campaignwill want to closely monitor for, and capitalize on, anybreach of these laws.• Stake-Building and Public Disclosure: Anessential consideration throughout a dissidentcampaign is early warning reporting requirementsunder securities law. Activists can acquire up toa 9.9% shareholding without being required tomake any public disclosure. Once a 10% stakeis accumulated, however, a press release mustbe immediately issued and an “early warningreport” must be filed within 2 business days.The shareholdings of persons acting “jointly orin concert” will be aggregated for the purposeof this 10% threshold. The mere formation ofa group (e.g. an activist and its “joint actors”)holding 10% or more will not trigger early warningreporting requirements (unless one of the groupmembers is already an early warning filer and theformation of the group is a change in material factin a previously filed report). However, absent anexemption, the subsequent acquisition of a singleshare by any group member will trigger reportingrequirements. Among other things, early warningreports require the activist to disclose its identity,ownership position and investment intent. Theearly warning regime is not intended to captureproxy holders given that the shareholder retainscontrol over how the shares are voted.An essential consideration throughout anactivist campaign is early warning reportingrequirements under securities law.
Ongoing Reporting: Upon attaining a 10%shareholding, an activist assumes ongoingreporting obligations. These include disclosureof (1) each time the activist acquires or disposes2% or more of the subject securities, (2) if theactivist falls below the 10% threshold, and/or(3) a material change in information within apreviously filed report.ɹ Eligible Institutional Investors: Shareholdersqualifying as “eligible institutional investors”,which includes eligible pension funds, hedgefunds and financial institutions, are able to usethe Alternative Monthly Reporting System(AMRS). Regarding stake-building in theactivist context, the AMRS requires disclosure(1) within 10 days of the end of the monthin which the 10% threshold is crossed, (2)whenever, after the 10% threshold is crossed,ownership increases or decreases 2.5% ormore relative to the previous report, (3) whenownership decreases below 10%, and (4)upon a change in a material fact within priordisclosure.ɹ Derivatives: At present, swaps generally donot count toward determining whether the10% (early warning reporting) or 20% (takeoverbid) thresholds have been reached. However,they may count where the activist has eithera legal right to control or direct the voting ofswap shares or a contractual right to influencevoting decisions regarding swap shares.Moreover, regulators have held inadequatedisclosure of swap holdings - such as in thecontext of a takeover bid - as a failure to complywith securities laws and even “abusive”. Oncethe 10% threshold is crossed such that earlywarning reporting is required, such disclosuremust include details of equity derivatives in theissuer held by the shareholder.Derivatives may count toward the 10% earlywarning reporting threshold where the activisthas either a legal right to control or direct thevoting of swap shares or a contractual right toinfluence the voting of swap shares.• Acting Jointly or in Concertɹ If an activist has an agreement, commitmentor understanding with one or more otherpersons and intends to exercise votingrights in concert with such other persons,they are presumed to be “joint actors”. If theagreement, commitment or understandingis with respect to the acquisition of shares ofthe target company, they are deemed to be“joint actors”. Importantly, the shareholdingsof “joint actors” are aggregated for purposesof the 10% early warning reporting thresholdand 20% takeover bid threshold.ɹ It has been held that acting jointly orin concert is a “relatively high” bar andrequires balancing the benefit of disclosingshareholder blocks against the benefitof allowing the “free flow of information”among public company shareholders. It hasalso been held that becoming “joint actors”generally requires “actively working togetherto achieve a joint specific purpose,” and not“simply being aligned in interest.” In onecase a court held that two funds and threeindividuals were “joint actors” in a dissidentcampaign based on evidence that included (1)a conference call involving a proxy advisoryfirm, (2) the discussion of confidentialgovernance committee proceedings, (3)their collaboration on a draft dissident proxycircular, and (4) their joint preparation of aformal voting support agreement. A companyalleging certain of its shareholders are “jointactors” bears the burden of proving this onthe balance of probabilities. This can includecircumstantial evidence, but this will bebalanced “against the reasonableness of otherexplanations that might explain the samecircumstance.”Becoming “joint actors” generally requires“actively working together to achieve a jointspecific purpose”, and not “simply beingaligned in interest”.6 | Shareholder Activism In Canada• Insider Trading and Tipping: ɹ Insider Trading: Trading with knowledge ofmaterial non-public information (MNPI) isprohibited. This includes MNPI that an activistlearns in private discussions with a target.However, the fact an activist is consideringcampaigning to replace target directorsgenerally does not, in and of itself, prohibit theactivist from acquiring target shares.ɹ Tipping: A person in a “special relationship”with a public issuer is prohibited from“tipping” or informing another person ofMNPI, other than “in the necessary courseof business”. Securities law classifies thosepersons in a “special relationship” with apublic issuer broadly, and this includesshareholders owning 10% of the voting rightsattaching to the issuer’s shares. Activists withaccess to MNPI therefore face an increasedrisk of violating, or being alleged to haveviolated, insider trading and tipping laws, andso should proceed with caution. The “in thenecessary course of business” exception tothe prohibition against tipping was recentlyaddressed by a securities tribunal for the firsttime, although not in the activist context.The tribunal provided four main guideposts,being (1) the standard is objective, (2) theexception should be interpreted narrowly, (3)the “necessary” course of business does notmean the “ordinary” course of business, and(4) the tipper bears the burden of proving theexception has been met. The tribunal alsounderscored the significance of the processwhereby the availability of the exceptionis considered around the time the MNPI isdisclosed.Activists with access to material non-publicinformation face an increased risk of violatinginsider trading and tipping laws.7 | Shareholder Activism In Canada• What Qualifies as a “Solicitation” of Proxies?: ɹ Subject to the “private solicitation” and“public broadcast” exemptions discussedbelow, Canadian corporate and securities lawsprohibit activists and issuers from solicitingproxies unless they have sent a proxy circularto each shareholder whose proxy is beingsolicited. “Solicitation” is broadly defined toinclude “a request to execute or not executea form of proxy” and a “communication toa shareholder under circumstances thatare reasonably calculated to result in theprocurement, withholding or revocation of aproxy.”ɹ Courts have held that the nature, contextand purpose of the communication is key.In one case, even though the activist’s letterto shareholders expressly stated it was notrequesting proxies at that time, the letter washeld to be a solicitation for also includinga request not to execute the form of proxycirculated by the target. In another case, ashareholder post on a public forum was heldto be a solicitation for urging shareholders tovote “withhold” or “against” the target’s slateof directors. The courts have also indicatedthat two or more communications (e.g., pressreleases) considered together can amount toa solicitation. Defensive communications bya target in response to an activist campaignand before the issuance of the company’sproxy circular will generally be viewed inthat context and thus afford the target somelatitude to defend directors and explain thecompany’s position.Courts have held that the nature, contextand purpose of the communication is key todetermining whether it amounts to a proxysolicitation.8 | Shareholder Activism In Canada3. Offensive TacticsAvailable to ActivistsOften characterized as “activist friendly”, Canadianlaw affords several avenues by which a dissident maypursue effecting change at a public company.• Shareholder Proposals: Canadian corporate lawaccommodates “activism-lite” via a shareholderproposal. Specifically, a dissident owning as littleas a 1% shareholding is entitled to have includedin a target’s proxy circular a paragraph of not morethan 500 words advocating its cause. However,where the proposal relates to the election of oneor more directors, a minimum 5% shareholding isneeded. In either case, the minimum shareholdingmust have been held for at least six months priorto the proposal’s submission. The inclusion of anactivist’s proposal in the target’s proxy circulardoes not relieve the activist of the obligation tomail its own circular if it seeks to solicit proxies.A court has ruled against an attempt by oneshareholder to use a shareholder proposal toremove a director at an upcoming shareholdermeeting already requisitioned by anothershareholder, holding that a separate requisitionwas required.“Vote No” campaigns do not require a proxycircular or an alternative slate of directors, andcan rely on the private solicitation and publicbroadcast exemptions.• “Vote No” Campaigns: “Vote No” campaigns aregenerally both easier and less costly to wage thanproxy contests, and this holds true in Canada.Per the majority voting rules under the CBCA,shareholders can vote “for” or “against” a nomineedirector in an uncontested election, and eachnominee must receive a majority of “for” votes tobe elected. Similar rules also apply to all TSX-listedissuers, who must have a majority voting policy.“Vote No” campaigns do not require a proxycircular and can rely on the private solicitation andpublic broadcast exemptions (discussed below).Nor do they require an alternative nominee orslate. They can thus be a cost-effective means oftargeting a specific director or board committee.“Vote No” campaigns can also serve as a valuablefallback strategy, e.g., where the activist hasmissed a nomination window under the target’sadvance notice bylaws (discussed below). Ina recent example, a TSXV-listed issuer with amajority voting policy substantially similar to thatrequired by the TSX rules found itself in a situationwhere each of its directors was concurrentlyrequired to tender their resignation after noneof the directors received a majority vote at theissuer’s AGM and following an activist campaign.This led to the immediate appointment of a new,independent director to recommend next steps,which eventually included a reformed board thatincluded a director closely affiliated with theactivist.9 | Shareholder Activism In Canada• Meeting Requisition: Upon accumulating a 5%shareholding an activist is entitled to requisition ashareholder meeting. The mere existence of thisright is a significant source of leverage, includingbecause Canadian corporate law preventspublic issuers from instituting “staggered”boards whereby only a subset of directors areup for election at a shareholder meeting. Arequisitioned meeting will therefore make theentire board vulnerable to replacement. TheTSX rules also inhibit “staggered” boards byrequiring that shareholders are entitled to voteon the election of the entire board at each AGM.Procedurally, the requisition notice must givesufficient information regarding the proposedbusiness to be discussed. Furthermore, giventarget-friendly caselaw, the exercise of this rightnecessitates careful planning and compliancewith technical requirements. For example,while statute may not expressly require thata shareholder requisitioning a meeting forthe removal of directors necessarily includeits proposed nominees, it has been held that,in the context of a proxy contest, reasonabledetail regarding the business to be conductedat the meeting would include the names andqualifications of the proposed nominees. Apractical consequence is that an activist shouldrecruit its board nominees sufficiently in advanceof requisitioning a shareholder meeting.While statute may not expressly mandate thata meeting requisition include the activist’sproposed board nominees, this has beenrequired by the courts.• Private Solicitation: In most jurisdictions,exemptions permit activists to solicit proxiesfrom up to 15 shareholders without mailinga dissident proxy circular. This allows for adegree of stealth, including as small numbers ofinstitutional investors often holds large blocksof shares in Canadian public issuers. That said,as discussed above, complex laws regarding“joint actors”, “insider trading” and “tipping” - towhich institutional investors are typically highlysensitive - must be carefully navigated. Privatesolicitation can be used alone or in conjunctionwith the “public broadcast” exemption(discussed below). It has been held that anactivist conducting a private solicitation coulduse the management form of proxy and thediscretionary authority granted thereunder toappoint himself as proxy holder and then elect anew board from the floor of the company’s AGM.Most jurisdictions provide an“private solicitation” exemptionwhereby activists are permitted to solicitproxies from up to 15 shareholders withoutmailing a dissident proxy circular.10 | Shareholder Activism In Canada• Public Broadcast: Another alternative to mailinga dissident proxy circular is proceeding bypublic broadcast, which can be by press release,advertisement or other notice generally availableto the public. This allows the activist to avoidthe time and costs associated with a circular(although certain information required in acircular must still be filed as part of the broadcast).This also provides an activist the opportunity fora loud opening salvo, including control over theinitial proxy contest narrative. A public broadcastcan also be followed by a dissident proxy circularto reinforce and continue the narrative andstrategy set by the public broadcast. However,an activist should be mindful that using thepublic broadcast exemption does not thereaftergive it the right to engage in private meetingswith shareholders beyond the private solicitationexemption (discussed above).The “public broadcast” exemption permits anactivist to issue a press release, advertisementor other notice to the public without mailing adissident proxy circular.• Dissident Proxy Circular: Should an activistwish to move beyond private solicitation and/or a public broadcast, the mailing of a dissidentproxy circular is facilitated by each shareholderbeing entitled to a list of each other registeredshareholder. Such a request will, however, alertthe target to the activist if this has not alreadyoccurred. Often, but not always, an activist willwait to mail its circular until after the target’scircular to take issue with or criticize aspectsthereof. In some cases, activists have prepared“pre-emptive” dissident circulars that areprovided to shareholders prior to the record dateto facilitate meetings beyond what would beallowed under the private solicitation exemption.• Proxy Advisor Support: Proxy advisory firmscan have crucial influence over shareholdervoting, as institutional investors often follow theirrecommendations and retail shareholders maybe influenced as well. Winning proxy advisorsupport is a significant advantage for any activistand can be achieved by presenting a compellingcase for change and, where necessary, effectivelycommunicating a well-reasoned and persuasivebusiness plan to them.• White Papers: Many activists find benefit inproducing a “white paper” prior to launching theircampaign. These are based on publicly availableinformation on the target that is required tobe disclosed under applicable securities laws.White papers often present a “case for change”in support of the activist’s agenda and can be keyin winning support from other shareholders and/or proxy advisory firms. They can also be of greatvalue in private discussions with management(and not only should a proxy battle eventuate).4. Defensive TacticsAvailable to TargetsTargets have at their disposal several structuraldefensive measures as well as other tactics availablein defence of an activist campaign.• Advance Notice Bylaws: Previous high-profileactivist campaigns have prompted most publiccompanies to adopt advance notice bylaws(ANBs). These have been accepted by Canadiancourts on the grounds they provide reasonableadvance notice of a contested board electionand thus promote an orderly director nominationprocess and informed shareholder decisionmaking. ANBs typically require (1) at least 30days advance notice of an activist nomination,(2) the identity, age and residency of nominees,and (3) details of any arrangements betweennominees and the activist. Certain disclosure bythe activist is also typically required, including (1)its other economic or voting interests, includingderivatives, and (2) proxies collected and anyother ability to vote shares. Each of the TSX, ISS andGlass Lewis have provided guidance regardingthe appropriate substance of ANBs. In a recentcase, the court held an activist’s alternative slatewas permissibly rejected by the AGM chair for afailure of the activist’s written notice to correctlyaccount for the proxies obtained by the activistin connection with a tender offer made by theactivist in the months preceding the AGM. Inanother case, a securities commission declinedjurisdiction over an activist’s claim the targethad inappropriately relied on its ANBs to rejectthe activist’s nominations, holding that the “coreof the dispute… engages corporate law, notsecurities law.”Canadian courts have endorsed advancenotice bylaws on the basis that they promotean orderly director nomination process andinformed shareholder decision-making.12 | Shareholder Activism In Canada• Shareholder Rights Plans: Many Canadianpublic issuers have adopted shareholder rightsplans (SRPs). While the utility of such plans in thecontext of hostile bids diminished markedly withthe overhaul of Canada’s takeover bid regimein 2016, in one case a securities commissiondeclined to cease-trade a SRP that effectivelydenied a hostile bidder the ability to purchaseadditional target shares during the course of itsbid. Specifically, the commission held the SRPwas a reasonable response to several concernsraised by the bidder’s use of derivatives inconnection with its bid, including regarding (1)the willingness of other bidders to take part inan auction, (2) the willingness of shareholdersto vote on a competing transaction, and (3)the outcome of any vote that might occur.Some companies have adopted “voting pills”which expand the circumstances in which aSRP is triggered by capturing proxy solicitationactivity and agreements among shareholdersto vote together, thereby hindering efforts byshareholders to use their collective voting powerto control the issuer. However, commentary byproxy advisory firms and securities regulatorsindicates that SRPs should not be expandedbeyond the takeover context and intocircumstances involving shareholder votingsuch as in contested director elections.Securities regulators and proxy advisoryfirms have cautioned against the use ofshareholder rights plans in the context ofcontested director elections.• Opposing Meeting Requisitions: Several courtshave interpreted Canadian corporate statutesnarrowly and technically to foil activist meetingrequisitions. This has made target attempts toinvalidate requisitions somewhat common. Othercourts have shown considerable deference tothe business judgment of boards regarding thetiming of requisitioned meetings. The end resultis that boards have been permitted to delaya requisitioned meeting until the company’snext-scheduled AGM and in one case for morethan 150 days. However, the court must beconvinced the board, in delaying the meeting,acted honestly, in good faith and with a viewto the corporation’s best interests. Where thecourt allowed a delay of 155 days it did sobecause it accepted the board’s concerns thatholding two separate meetings would (1) strainthe company’s limited financial resources, (2)lead to voter fatigue, (3) put undue pressure onmanagement, and (4) not result in any prejudiceto the requisitioning shareholder.The courts have at times shown considerabledeference to the business judgment of boardsregarding the timing of requisitioned meetings.13 | Shareholder Activism In Canada• Complaints to Securities Regulators: Anothercommon target reaction to a dissident campaignis alleged noncompliance by the activist withsecurities legislation, such as regarding (1)early warning reporting requirements, (2)prohibitions against insider trading or tipping,(3) share accumulation triggers resulting fromalleged “joint actor” status, (4) compliancewith proxy solicitation rules, and/or (5) allegedmaterial public misstatements. In respondingto an activist campaign, targets should alsobe careful they do not go offside corporate orsecurities law themselves. In one case, after theactivist requisitioned a shareholder meeting andissued a subsequent press release criticizingthe target’s board, the target responded with itsown press release (1) criticizing the activist, (2)defending its leadership, and (3) explaining itsreasons for combining the requisitioned meetingwith its AGM. The target press release also statedthe target board would continue to engagewith shareholders and that the target wouldbe issuing a management information circular.The court rejected the activist’s allegation thatthe target press release constituted a impropersolicitation of proxies for occurring without acircular, holding that the principal purpose of thepress release was to defend the target’s position,and not to solicit.• Private Placements: Several companies havemade private placements amid an activistcampaign. In one case, a court permitted a privateplacement shortly ahead of a requisitionedshareholder meeting, in part because the courtaccepted evidence the private placement wasa legitimate business decision taken in thecompany’s best interests, and thus deservingof the court’s deference under the businessjudgment rule. In another case, securitiesregulators permitted a private placement madefollowing activist activity that began as a “voteno” campaign and evolved into an unsolicitedtakeover bid, in part because the securitiestribunal accepted evidence the company hada serious and immediate need for financing.However, target directors contemplating aprivate placement amid an activist campaignshould tread carefully as an issuance of sharesinterpreted as inappropriately intended to defeata dissident’s attempt to replace incumbentdirectors could give rise to liability under claimsof oppression of minority shareholders or forbreach of fiduciary duty.Any private placement made by a target amidan activist campaign must be a legitimatebusiness decision taken in the company’s bestinterests, e.g., in response to a serious andimmediate need for financing.5. Potential ActivistResponses to TargetDefencesCanadian law allows for numerous potential activistresponses to the target defensive tactics canvassed inthe previous section.• Challenging ANBs: Activists have beensuccessful in challenging a target’s invocationof ANBs amidst a proxy contest. Importantly, thecourts have held that ANBs should operate as a“shield” to protect against “ambush” and not as a“sword” designed to exclude nominations givenon reasonable notice or to buy excess time toattempt to thwart a dissident campaign. Sotoo have courts held that any ambiguity in thedrafting of ANBs should be resolved in favourof shareholders’ voting rights. In one case thecourt was not prepared to declare a company’sANB as invalid for being overly broad such thatthey violated statutory shareholder rights. Thecourt stated such a remedy could be possible inappropriate circumstances but that the scope ofANB’s should generally be left for shareholders toapprove and that the court should not be put inthe position of re-drafting corporate documents.Instead, the court focused on the “purpose andintent” of the ANB to hold that the activist hadmet its requirements.Courts have held that advance notice bylawsshould operate as a “shield’ to protect against“ambush” and not as a “sword” in an attempt tobuy excess time to thwart an activist campaign.15 | Shareholder Activism In Canada• Challenging SRPs: Proxy contests in Canadainclude several examples of regulators ceasetrading SRPs put in place by targets. In sodoing, a key principle invoked by regulators andcourts has been protecting the opportunity ofshareholders to exercise their rights as such.Regulators have also indicated that SRPs shouldgenerally not be utilized to deem a shareholderto beneficially own shares subject to a lock-upagreement “in circumstances where they wouldnot be deemed joint actors under the applicablerules.” In addition, proxy advisors have made itclear that they would generally recommendvoting against the approval of voting pills, andit is expected that securities regulators wouldintervene to cease-trade voting pills out ofpublic interest concerns that they are abusiveof shareholders’ rights. Recently, securitiesregulators cease-traded a SRP instituted afteracquisition discussions broke down and theprospective buyer responded by requisitioninga special shareholder meeting to nominate newdirectors for election. The SRP prohibited anyperson from acquiring more than a 15% interestin the company except pursuant to a formaltakeover bid, and in cease-trading it the tribunalrepeatedly emphasized the “primacy” of thetakeover bid regime’s “essential components”following the 2016 regime amendments, which inthis case was the 20% trigger the plan effectivelysought to lower to 15%.Securities regulators have cease-tradedshareholder rights plans amid an activistcampaign for impeding shareholders’ ability toexercise their rights as such and for impingingon the “essential components” of the 2016takeover bid regime.• Contesting Delayed Special Meetings: Wherea 5% activist requisitions a meeting, the target’sboard is required to call the meeting within 21days of receipt of the requisition. Moreover, if theboard doesn’t call the meeting within 21 days ofthe requisition, the activist can call the meetingdirectly. In such circumstances the activist willalso be entitled to be reimbursed its reasonablecosts incurred in calling and holding the meeting.If the target’s board calls the meeting butselects a date involving “unreasonable” delay,the activist can seek a court order forcing anearlier date. Notably, recent caselaw emphasizesthe importance of the process a board adoptsin responding to a meeting requisition: if theboard does not give sufficient considerationto the specific requisition in the specificcircumstances, the board’s deliberations may bedeemed undeserving of the court’s deference.In this case, the court refused to permit a delayof five months taking issue, among other things,with the fact (1) the board had held only a single,two-hour meeting to discuss the requisition, (2)the requisition was only a single agenda itemat the meeting, and (3) the trustees targetedby the activist did not recuse themselves fromthe discussion. The substance of the board’sdecision must also withstand basic scrutiny. Thecourt rejected the company’s justification ofcombining the meeting with the company’s AGMbased on cost concerns given the company’ssignificant financial resources. The court rejectedthe company’s justification that the delay wouldallow it to see through its business plans on thebasis that this would defeat the shareholder’svery purpose in requisitioning the meeting.Recent caselaw indicates courts will scrutinizeboth the process adopted by the target boardin responding to a meeting requisition as wellas the substance and reasonableness of theboard’s ultimate decision.16 | Shareholder Activism In Canada• Contesting Tactical Private Placements:Securities regulators have impeded privateplacements made amid an activist campaign onmultiple occasions. In one case, the TSX refused toapprove a private placement following concernsraised by the activists (who had requisitioneda shareholder meeting) that the issuance wasan inappropriate defensive tactic and after theTSX’s investigation identified the company wasin breach of two of the exchange’s policies. Inanother case, the TSX’s conditional approvalof the issuance of equity for existing debt eightdays prior to the record date for a shareholders’meeting requisitioned to replace the company’sdirectors was set aside by securities regulatorspending a meeting of shareholders to either ratifythe issuance or instruct the board to reverse theissuance. In a third case, a private placementafter an activist had requisitioned a shareholdermeeting led to undertakings to securitiesregulators that the issuer could and would unwindthe issuance in the event the activist’s applicationto the securities commission was successful.• Oppression Remedy: A powerful and versatileweapon in an activist’s arsenal in Canada is anoppression claim. A creature of statute, oppressionprotects against corporate or director conduct thatis unfairly prejudicial to one or more shareholders.Moreover, available remedies include restraintof the oppressive conduct, setting aside atransaction, or even the removal or replacementof directors. For example, oppression claimshave been brought in pursuit of (1) appointingan independent chair for a shareholder meeting,(2) limiting commercial acts a target can engagein prior to the meeting, and (3) compellingadditional target disclosure. In another example,the disqualification of proxies at a shareholdermeeting on the basis of improper solicitation asalleged by the meeting chair (and where no suchimproper solicitation had actually occurred) washeld to constitute oppression. In a third casethe court held oppression to have occurredat a contested AGM on both procedural andsubstantive grounds. The conduct of the meetingchair was oppressive for refusing to explain whyhe had rejected the activist’s proxies and forindicating coordination with management. Therejection of the activist’s proxies was oppressivesubstantively for being based on an unreasonablereading of the company’s ANBs.An oppression claim is a versatile option inan activist’s arsenal in Canada and has beenbrought in pursuit of various different remediesamid dissident campaigns.17 | Shareholder Activism In Canada6. Additional Legal ConsiderationsSelect additional legal considerations for targets andactivists include the following.• Soliciting Dealer Fees: Although solicitingdealer fees are technically not illegal inCanada, the practice is not risk free. Any sucharrangement must be disclosed in a dissident’sand/or target’s proxy circular. Significantreputational consequences may also ensue, asillustrated by previous high-profile proxy battlesand given certain market disfavour toward suchstrategies. Related regulations also come intoplay, including of the Canadian InvestmentRegulatory Organization (CIRO).• Protocol Agreements: Activists can attempt topersuade a target to enter a protocol agreementestablishing meeting mechanics, including theability to review proxies and the procedure foraccepting proxies. The reality, however, it thatthe target has no legal obligation to accede toa protocol agreement, and so such attemptsare often rebuffed. Nor is the target under anyduty to disclose any voting results before theirannouncement at a meeting.18 | Shareholder Activism In Canada• Independent Chair: Canadian courts would notbe expected to appoint an independent chairbased on alleged conflict of interest arisingmerely from the chairman standing for reelection. Where activists have been successfulsecuring an independent chair, it has generallybeen based on a more acute conflict or evidenceof bias indicating an independent chair isnecessary to achieve fairness. In the words ofone court: “[T]he test for the appointment of anindependent chair is… whether there is evidencethat the proposed chair has threatened to or willnot act fairly or reasonably in relation to dutiesas chair of the meeting, or whether there isevidence that the proposed chair has committedany act or omission that has created a reasonableapprehension that the proposed chair will notact fairly or reasonably.” That said, the courtadded: “The appointment of an independentchair is warranted where it is in the company’sbest interests to avoid bias or the appearanceof it…” The independence of a meeting chairwill be undermined where the chair refusesto explain important decisions or exhibitsdeference towards management (e.g., allowingthe company’s counsel to answer shareholderquestions directed at the chair). This in turn willundercut the deference to chair decisions thecourts normally give.Before appointing an independent chair, courtswill generally require evidence of a reasonableapprehension the proposed chair will not actfairly or reasonably.• Settlement Agreements: Targets oftenrecognize that defending against a proxy contestrequires the commitment of significant timeand resources and will disrupt management’sexecution on business objectives. As such,opportunities to reach settlement typically arise,sometimes even before the activist campaignbecomes public. Alternatively, opportunities forsettlement may be delayed and only arise as theanticipated results of the proxy contest becomeclearer. It is common for settlement agreementsin Canada to include board nomination rights,committee representation and reimbursementof expenses. In exchange, activists often acceptstandstill provisions that prevent the activistfrom acquiring any additional interest in thetarget or taking any action to remove directorsfor a stipulated period of time.Settlement agreements between targets andactivists commonly include nomination rights,committee representation, reimbursement ofexpenses, and standstills.19 | Shareholder Activism In Canada• Governance Issues Raised by NomineeDirectors: Where an activist successfullysecures the nomination of one or more directors,applicable corporate governance law must becarefully navigated: nominee directors in Canadamust balance a delicate tension. On the one hand,activists campaign and negotiate for nominationrights to monitor company business and havetheir views advanced in the target’s boardroom.On the other hand, a nominee director’s dutiesremain owed solely to the company and are notat all attenuated by virtue of being a nomineedirector. This conflict between the activist’sexpectations and the director’s fiduciary dutiesmust be carefully managed, including regardingpotential conflicts of interest and the potentialsharing of confidential target information. Thisis particularly the case for U.S. activists, ascorporate governance law in Canada differsfrom Delaware law on several key points. Forexample, unlike in Delaware where a contractualright to nominate a director automatically carriesa presumption the nominee director will shareconfidential information with the nominatingshareholder, in Canada a nominee director canonly share confidential company informationwhere the company has expressly or impliedlyconsented. Canadian caselaw also creates thepotential risk, albeit generally remote, that inexceptional circumstances a nominee directorcould be required by their fiduciary duty ofloyalty to the company to disclose informationof the nominating shareholder to the company.Securities law regarding insider trading andtipping (discussed above) will also have to becarefully navigated, including because thenominee director will be a person in a “specialrelationship” with the company.Nominee directors must navigate a delicatetension between their fiduciary duties tothe company and the expectations of thenominating activist, including regardingconfidential company information.
