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Key trends in shareholder activism

i Continued sustained levels of activism

The Canadian market saw a sharp spike in activism campaigns during the financial crisis of 2008 and 2009. Since then, the number of proxy contests in the Canadian market annually has remained above pre-crisis levels, averaging around 30–40 public contests per year.8 Market caps of companies targeted are weighted heavily towards the small- and mid-cap sector, with only a handful of companies valued above US$1 billion being targeted in any year.

Despite activism being a reality of the Canadian public markets, the level of shareholder activism in the Canadian market tends to lag levels that have been seen in the United States and Europe in recent years, particularly among large-cap Canadian companies.

As was witnessed globally, the covid-19 pandemic caused a slowdown in the rate of activism in Canada in the first and second quarters of 2020 as boards and management were given more space to respond to the challenges of the pandemic. However, as businesses found their footing and stock market performance rebounded from the initial pandemic-induced shock, activity has been returning to typical levels. In total, 36 public contests were initiated in 2020, down just slightly from the prior year.9

ii Targeted industries

The lower rate at which large Canadian companies are subjected to activist campaigns is likely attributable to the selection of companies available for investment in Canada. Large international activist funds seem to be finding their preferred targets in their home markets or in international markets other than Canada.

The mix of companies traded on Canada's senior securities exchange, the TSX, may shed some light. The TSX Composite Index comprises 31.6 per cent of financial services firms (dominated by banking and insurance).10 Another 13.1 per cent of the TSX index comprises companies in the energy sector, and the basic materials and industrial sectors represent 11.7 per cent and 11.4 per cent, respectively. Despite their large share of the Canadian market, financial firms are infrequently targeted by activists.11 Firms in the materials sector, particularly mining, are frequent targets, particularly when changes in the commodity cycle put companies under pressure.

Real estate investment trusts (REITs) have also generated a notable number of proxy contests, including contests initiated by activist Sandpiper Asset Management at several REITs (Granite REIT, Agellan Commercial REIT and Artis REIT) and the successful demand of FrontFour Capital Group for board seats at Cominar REIT in 2019. Disruption in the real estate market due to the covid-19 pandemic could prompt further activity as valuations in this sector, particularly the office and retail real estate markets, have come down significantly.

iii Activist success rates

Proxy contest outcomes in public contests, where an activist has made a public demand, are generally split between dissidents and management. In 2020, management was successful in resisting the activist in 56 per cent of public contests, compared with an average management success rate of 54 per cent in the three year period 2017–2019.12 While this suggests that management holds a slight edge, the significant level of activist success gives management a strong incentive to explore acceptable settlement terms. Settlements resulting in activists gaining board seats have become increasingly common, with 30 per cent of public contests being resolved through settlement, a steady increase from just 12 per cent in 2016.13

iv Growing prominence of Canadian activists

Historically, the Canadian market has not been home to dedicated activist investors; that is, investors who look for investments with a view to employing activism to create value. Rather, Canadian activists have generally been occasional or situational activists; investors driven to activism by circumstances of an existing investment, such as a pension fund deciding to take a more activist role with respect to a floundering portfolio position, or a former CEO seeking to take back the reins of a company.

While Canada still lacks a critical mass of dedicated activist funds of notable size, a number of Canadian headquartered managers with explicit activist strategies have emerged in the past 10 years. Smoothwater Capital Corporation based in Toronto was one of the first funds to emerge as a dedicated Canadian activist fund. It waged successful campaigns at Genesis Land Development and later at Equity Financial, eventually acquiring the latter in 2017.

Sandpiper Asset Management, a Vancouver based fund established in 2016, has run several successful campaigns in the Canadian real estate sector, including Agellan Commercial REIT and Granite REIT in 2017, Artis REIT in 2018, and Extendicare in 2019.

Waterton Global Resource Management, Inc., a Toronto based private equity firm with US$1.75 billion under management, is focused on investments in the resource sector and has pursued activism as a strategy in its successful 2019 proxy contest against HudBay Resources.

Another Canadian firm, Catalyst Capital Group, has used activism to oppose two recent M&A transactions: the privatisation of Hudson's Bay Company (discussed below) and the acquisition by Corus Entertainment of media assets from a company under common control with Corus. In these transactions, Catalyst has demonstrated its willingness to devote substantial resources to its campaigns, taking full advantage of minority shareholder protections, including through applications to securities regulators to make rulings under Canadian rules governing related party transactions.

v US activists in Canada

US hedge funds focused on activist strategies frequently target Canadian companies and many have recognised the advantage of Canada's activist-friendly legal regime. The Canadian market also makes for an attractive hunting ground for smaller hedge funds that are able to take larger stakes in Canada's typically smaller companies.

Large US activists, including Carl Icahn, Pershing Square Capital Partners and Jana Partners, have largely led the expansion of activism to Canadian large-cap companies. Pershing Square's 2012 campaign to elect a dissident slate and install a new CEO at Canadian Pacific Railway continues to stand as a landmark proxy contest. Pershing Square's success in electing its slate with overwhelming shareholder support signaled to the boards of established Canadian companies that their market caps and the unmatched pedigrees of their board members did not assure them the loyalty of their shareholder base.

Despite Pershing Square's success and Canada's shareholder friendly regime, public contests at large-cap Canadian companies have been more episodic than frequent, with the level of shareholder activism by large US activists in the Canadian market tending to lag levels that have been seen in other jurisdictions in recent years.

vi Activism in controlled companies

Several large Canadian companies are controlled by founding families or shareholders holding controlling stakes, either through majority ownership or through classes of multiple-voting shares. Strictly speaking, these companies are immune from activist attack, with their controlling shareholders holding the power to exclude dissidents from the board room and to defeat their proposals. However, in recent years, numerous controlled companies in Canada have been targeted by activists undaunted by the impossibility of winning a vote.

In the spring of 2020, Tribeca Investment Partners of Australia and Impala Asset Management of the United States launched a campaign advocating the removal of Teck Resources' CEO, alleging a decade of underperformance relative to other diversified miners, and urging the divestment of Teck's oil investments. Although the company is controlled by the family of the founding shareholder through multiple voting shares, the activists waged their campaign through public pressure. Despite this pressure, Teck has stayed its course, and its CEO received a 97 per cent shareholder approval at Teck's 2021 AGM.

Some activists are even willing to run proxy contests that they are unable to win. For example, Pentwater Capital submitted shareholder proposals seeking both the election of its portfolio manager to the board of Turquoise Hill Resources and an amendment to the company's charter that would give minority shareholders the power to elect a minority of the board in future elections. Without the support of Rio Tinto plc, Turquoise Hill's majority shareholder, these proposals inevitably failed. Yet Pentwater has carried out a formal campaign to encourage other minority shareholders to support its proposals.

Recent shareholder activism campaigns

i Detour Gold

Following a series of setbacks that negatively impacted Detour Gold Corp.'s share price, in 2018, US hedge fund Paulson & Co. succeeded in its campaign to replace the board of Detour and pursue a sale of the company.

In July 2018, months of agitation by Paulson evolved into an open proxy battle between the hedge fund and Detour. Paulson requisitioned a special meeting of shareholders and proposed a slate of eight directors. In letters to shareholders, Paulson outlined its reasons for proposing a wholesale change to the company's board, including the poor performance of Detour's shares relative to peers, operational setbacks, poor disclosure practices, insider sales of shares and discordant executive remuneration. In response, Detour warned against a 'fire sale' of the company and argued that continuity was needed to execute the company's business plan. The proxy advisory firm Glass Lewis & Co. ultimately supported three of the hedge fund's eight nominees, while Institutional Shareholder Services supported the company's proposed slate of directors.

Paulson effectively won the proxy contest at the 13 December 2018 special meeting, with five of its eight nominees elected to Detour's board. Following the proxy contest, the newly constituted board hired a new management team and, in late 2019, explored strategic alternatives, ultimately leading to a sale of the company to Kirkland Lake Gold in 2020.

ii Hudbay Minerals

In October 2018, Waterton Global Resource Management, Inc. launched a proxy contest at Hudbay Minerals Inc. that ultimately resulted in the private equity firm obtaining minority representation on the board. Waterton feared that Hudbay was on the verge of entering into a dilutive acquisition, and initially requisitioned a special meeting of shareholders of Hudbay to adopt an advisory resolution against such a transaction.

Waterton later withdrew the requisition and instead commenced a proxy contest to place eight nominees on Hudbay's 10-person board, later downsizing its slate to five nominees. Waterton's key criticisms were that Hudbay had underperformed relative to its peers and had not allocated sufficient capital to its existing projects.

In May 2019, four days before the meeting of shareholders, Hudbay and Waterton announced a settlement in which they agreed to a mutually acceptable board of eleven and to initiate a process to identify a suitable successor for the chair of the board.

iii Inter Pipeline

Brookfield Infrastructure Partners Ltd's (Brookfield Infrastructure) hostile takeover of Inter Pipeline Ltd (Inter Pipeline) is another M&A transaction having shades of shareholder activism issues. In February 2021, Brookfield Infrastructure commenced a bid for Inter Pipeline valued at C$16.50 per share. In announcing its bid, Brookfield Infrastructure disclosed that it owned 9.75 per cent of Inter Pipeline's common shares and in addition held derivatives giving it an economic interest equivalent to a further 9.9 per cent interest in Inter Pipeline. Inter Pipeline's board unanimously rejected Brookfield's bid and initiated a complaint to the Alberta Securities Commission that Brookfield should have publicly disclosed its ownership prior to commencement of its bid and is improperly using its 9.9 per cent derivative position to block other potential transactions. The case could prove to be an important precedent on the use of derivatives to avoid Canadian beneficial ownership reporting obligations and restrictions on acquisitions above 10 per cent. A decision of the regulator in the case could have repercussions for shareholder activism given the common practice of activists increasing their economic exposure to a target through the use of cash-settled derivatives.

In addition to commencing regulatory proceedings to fend off Brookfield's bid, Inter Pipeline generated an auction, announcing in June 2021 that it had entered into a friendly takeover transaction with Pembina Pipeline Corporation (Pembina) valuing Inter Pipeline at C$19.45 per share. Brookfield Infrastructure has since countered and revised its hostile takeover bid, which now values Inter Pipeline at C$19.75 per share. The board of Inter Pipeline continues to publicly support the Pembina transaction.