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Key trends in shareholder activism

i Sustained levels of activism

Since a sharp spike in activism during the financial crisis of 2008 and 2009, the number of proxy contests in the Canadian market annually has averaged around 30 to 40 public contests per year.10

The level of shareholder activism in Canada tends to lag behind levels that have been seen in the United States and Europe in recent years, particularly among large-cap Canadian companies. Historically, market caps of targeted companies 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. However, TCI Fund Management’s (TCI) campaign against CN and Elliott Management’s (Elliott) campaign against Suncor could be indications of a resurgence in large-cap activism in Canada.

Traditionally, board-related activism has been the most common form of shareholder activism seen in Canada. However, the prevalence of transaction-related activism has increased steadily in recent years to the point that, in 2022, instances of transaction-related proxy contests exceeded those of board-related proxy contests.11

In total, 35 public contests were initiated in 2022, representing the fewest Canadian companies subjected to proxy contests since 2017.12 The momentary dip in proxy fights in 2022 (likely attributed to global economic uncertainty) was promptly followed by a resurgence in activism overall in the first quarter of 2023, with 22 companies targeted by activists, marking a 29 per cent increase from 2022 and the highest level of activity since 2019.13

ii Targeted industries

Despite their large share of the Canadian market (dominated by banking and insurance), financial firms, which comprise approximately 30 per cent of the S&P/TSX Composite Index,14 are infrequently targeted by activists. Approximately 17 per cent of the S&P/TSX Composite Index comprises companies in the energy sector, and the industrials and materials sectors represent approximately 14 per cent and 12 per cent, respectively.15 Firms in the materials sector, most notably mining, are frequent targets,16 particularly when changes in the commodity cycle put companies under pressure. The concentration of Canadian companies in these sectors and the limited offering of consumer, diversified and other non-regulated industries are likely accountable for lower levels of large-cap activism in Canada than in other international markets.

Real estate investment trusts (REITs) have generated a number of proxy contests in Canada. That trend continued in 2023, with higher borrowing costs and disruption to office and industrial markets making REITs in those sectors more vulnerable to attack. Vancouver-based activist Sandpiper Asset Management (Sandpiper) has been particularly active in REIT activism (including at Granite REIT, Agellan Commercial REIT and Artis REIT). Most recently, Sandpiper reached a settlement with First Capital REIT (First Capital) in connection with its campaign to replace trustees on First Capital’s board in March 2023. Similarly, Slate Office REIT agreed to board changes in 2023 in response to pressure from its largest unitholder.

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. From 2018 to 2021, management was successful in resisting the activist in approximately 60 per cent of public contests.17 Activists experienced a comeback in 2022, winning or partially winning approximately 52 per cent of public contests in Canada.18 Settlements resulting in activists gaining board seats have become increasingly common, with 38 per cent of public contests resolved through settlement in 2022.19

iv Growing prominence of Canadian activists

While Canada still lacks a critical mass of dedicated activist funds of notable size, several Canada-headquartered managers with explicit activist strategies have emerged in the past 10 years. These include Smoothwater Capital Corporation and Waterton Global Resource Management (which waged a successful 2019 proxy contest against HudBay Resources).

Another Canadian firm, Catalyst Capital Group, has used activism to oppose two large M&A transactions: the 2019 privatisation of Hudson’s Bay Company and the 2016 acquisition by Corus Entertainment of media assets from a company under common control, with Corus devoting substantial resources to litigating its complaints before securities regulatory panels.

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, Jana Partners and Elliott Management, 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 continues to stand as a landmark proxy contest. The overwhelming shareholder support that Pershing Square garnered signalled to the boards of established Canadian companies that their market caps and the unmatched pedigrees of their board members do not guarantee 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 behind levels seen in other jurisdictions.

vi Activism in controlled companies

Controlled companies are mostly immune from activist attack, with their controlling shareholders holding the power to exclude dissidents from the boardroom 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 for the removal of Teck Resources Limited’s (Teck) 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 stayed its course, and its CEO received 97 per cent shareholder approval at Teck’s 2021 annual general meeting.

Some activists are willing to run a proxy contest even absent the prospect of its success. For example, before Turquoise Hill Resources (Turquoise Hill) was taken private by controlling shareholder Rio Tinto, Pentwater Capital Management (Pentwater) engaged in activism on multiple occasions, including by submitting shareholder proposals seeking election of its portfolio manager to the board and an amendment to the company’s charter to give minority shareholders the right board representation. These proposals inevitably failed because of Rio Tinto’s control. In spite of this, Pentwater carried out a formal campaign to encourage other minority shareholders to support its proposals.

Recent shareholder activism campaigns

i CN

TCI’s proxy fight at CN came at the tail end of CN’s failed takeover bid for Kansas City Southern (KCS). In its September 2021 proxy circular, the activist said that the attempted deal exposed a basic and fundamental misunderstanding on the part of the board of the current state of the railroad industry and regulatory environment.

In April 2021, CN outbid Canadian Pacific for KCS. TCI, a shareholder in both Canadian railway bidders, first opposed CN’s transaction in May 2021. In a letter to CN’s chair, TCI urged CN to abandon the deal unless the merger agreement was amended to remove the condition that a voting trust be approved, citing regulatory hurdles and potential break fees. Amid anticompetition concerns, CN had proposed to create a voting trust in which it planned to hold acquired KCS shares. In contrast to CN, Canadian Pacific presented a more straightforward acquisition, with few significant regulatory hurdles, as Canadian Pacific did not have overlapping rail networks with KCS.

In September 2021, CN’s transaction was terminated following a rejection by the US regulator.20 TCI then launched a proxy contest to replace four CN board members and the CEO. TCI blamed CN’s chair and CEO for the regulatory mishap, calling for both of their resignations. One of CN’s biggest shareholders, Canadian pension fund Caisse de dépôt et placement du Québec (CDPQ), voiced support for CN’s board and management against TCI’s criticisms. CDPQ said that it believed that CN did its homework on the takeover, while questioning the motivations of TCI’s campaign and citing TCI’s rare position as an activist with shares of both companies on either side of the KCS bidding war.

Two months ahead of the special meeting to be held on 22 March 2022, CN named a new CEO as part of a settlement with TCI, which included a commitment to appoint two new mutually agreed independent directors.

TCI remained outspoken against CN post-settlement. In May 2022, the activist criticised CN’s climate engagement strategies, calling them ineffective. This commentary coincides with TCI’s recent practice of submitting resolutions at companies to ‘explain or justify’ why it cannot achieve its short-term emissions goals.

ii Suncor

In April 2022, Elliott sent a letter to Suncor’s board, calling on them to improve the company’s performance and launch a wide-ranging review of the business and its management. Elliott pressed Suncor to appoint five new independent directors with deep expertise in the Canadian energy industry. Elliott criticised Suncor for its stagnated stock price despite rising oil prices, missed production goals, high costs and safety failures.

The activist recommended that Suncor review its non-core assets and consider whether value could be unlocked through the sale of its retail network of gas stations, estimating that its collective suggestions could unlock C$30 billion in value. In July 2022, Suncor reached an agreement with the activist, granting Elliott the ability to appoint three directors to Suncor’s board. Pursuant to the settlement, Elliott was also granted the right to appoint a fourth board member if Suncor did not meet certain performance criteria relative to peers by the end of 2022. Elliott exercised its right to nominate a fourth director in March 2023 following Suncor’s naming of a new CEO in February 2023.

iii Contested M&A and the role of proxy advisers

Three recently completed M&A transactions faced staunch opposition from activists before ultimately obtaining shareholder approval. Activists took aim at each of Rio Tinto’s acquisition of Turquoise Hill, Ritchie Bros Auctioneers Inc’s (Ritchie Bros) acquisition of IAA Inc (IAA) and the privatisation of Magnet Forensics Inc (Magnet). In each case, the activists principally focused on a perceived undervaluation of shares.

In March 2022, Rio Tinto proposed to buy out the remaining 49 per cent stake in Turquoise Hill held by the company’s minority shareholders. Pentwater and SailingStone Capital Partners (SailingStone) criticised the C$34 share price as being too low. Turquoise Hill rejected Rio Tinto’s initial offer but later agreed to sell its remaining shares to Rio Tinto for C$43 per share in cash. Pentwater argued that the deal price was drastically inadequate, and the activists were initially successful in blocking the approval. In an attempt to resolve the impasse, Rio Tinto signed agreements with Pentwater and SailingStone, offering both activists resolution of dissent rights through private arbitration. Rio Tinto terminated both agreements amid concerns from Canadian securities regulators, the Turquoise Hill special committee and other minority shareholders. Rio Tinto subsequently offered enhanced dissent rights to all minority shareholders. The requisite majority of minority shareholders approved the deal in December 2022, with less than 17.5 per cent exercising dissent rights.

Ritchie Bros’ acquisition of IAA faced activist opposition on both sides of the transaction, with Luxor Capital (Luxor) lobbying Ritchie Bros shareholders to reject the transaction on dilution concerns.

In January 2023, Magnet agreed to be acquired by Thoma Bravo. Nellore Capital Management (Nellore Capital) opposed the sale, calling the proposed transaction structurally unfair, opportunistic and undervalued, estimating Magnet’s intrinsic value at C$60 to C$70 per share. In an open letter to the special committee of Magnet’s board, Nellore Capital argued that rolling shareholders (comprising mostly insiders and affiliates) opting to keep 55 per cent of their stake indicated the insiders’ confidence in Magnet’s prospects, and implied that the cash price offered to public shareholders was unattractive. Despite Nellore Capital’s efforts, including distribution of a dissident proxy circular, the transaction received support from 67 per cent of independent shareholders and was completed in April 2023.

In each of these three transactions, the proponents failed to secure unanimous supporting recommendations from the two major proxy adviser firms ISS and Glass Lewis. ISS sided with the activists in Turquoise Hill, whereas Glass Lewis endorsed the buyout, deeming the C$43 per share a reasonable exit price. In Magnet’s acquisition by Thoma Bravo, Glass Lewis agreed with the dissidents’ views on value and raised concerns about the valuation process and takeover structure. Both ISS and Glass Lewis recommended shareholders vote down Ritchie Bros’ acquisition of IAA due to dilution impact on Ritchie Bros shareholders. While failure to garner recommendations created headwinds, each transaction ultimately obtained the requisite level of support. These high-profile examples demonstrate the importance of focused monitoring of the shareholder base and the success that can be achieved through good communication with shareholders to counteract proxy adviser influence.