Canadian corporate and securities laws have provided shareholders with robust rights for many decades. Yet, it has only been more recently that Canadian companies have seen a dramatic rise in shareholders availing themselves of these rights. Institutional shareholders have increasingly used their rights and influence to propose corporate governance changes, to reform executive compensation and adopt say-on-pay policies, and to push for improved environmental social and governance (ESG) practices. At the same time, and particularly since the 2008–2009 financial crisis, shareholders have increasingly resorted to proxy contests, or wielded threats to do so, to effect governance changes.
Canadian boards know that disappointed shareholders will not be patient for long, and boards have become more sophisticated in understanding how to deal with an activist attack. Indeed, it has become increasingly common for boards to have one or more directors who have lived the drama of a public shareholder activism campaign, either while serving on another board, in an executive capacity, or even as a nominee for a dissident.
More boards are accepting that part of their job is to know the shareholder base and to participate in direct shareholder engagement. Boards that leave all shareholder interaction to senior management or the investor relations team are much less likely to win the support of shareholders when problems arise and a dissident has emerged.
The Canadian market is considerably influenced by developments in the United States and trends in corporate governance often flow north across the border. However, with respect to shareholder rights, the Canadian legal regime takes a lighter regulatory approach in numerous respects, allowing shareholders to act more freely than under comparable rules in the United States.
Legal and regulatory framework
The Canadian legal landscape is an accommodating one for shareholder activists, providing significant freedom for shareholder activists to seek governance change.
The legislative and regulatory framework in Canada governing public companies primarily comprises corporate and securities laws. The key legal tools relating to shareholder rights, shareholder activism and shareholder engagement are contained in corporate law statutes, which are enacted federally and by each province and territory.2 These tools include the rights of shareholders to requisition a meeting, make a shareholder proposal, solicit proxies and pursue the oppression remedy and derivative action in courts.
Canadian securities laws govern the disclosure obligations of companies and also impose disclosure obligations on significant shareholders and dissident shareholders who engage in proxy solicitation. Securities laws are the responsibility of the provincial and territorial governments, with no central federal regulating authority; however, relevant laws are substantially uniform across Canada's provinces and territories.
In addition to setting out prescribed rules governing public companies and their shareholders, securities legislation also empowers securities regulators with a general power to make orders that are in the public interest.3 This public interest jurisdiction has been used by securities regulators in situations where actions by market participants are found to be abusive of the capital markets or inconsistent with the animating principles of securities laws, even if an actual breach of law is not established.
Rules and policies set by stock exchanges supplement the securities law obligations of public companies, and include requirements aimed at protecting shareholder interests, for example, by establishing rules governing dilutive acquisitions, private placements, timely disclosure and shareholder approval of equity compensation plans.i Shareholder proposals
All but two provincial corporate law statutes provide for the submission of shareholder proposals to be considered at the next meeting of shareholders. Generally, the only requirement for a person to be able to submit a proposal is that the person be entitled to vote at the meeting of shareholders.4 A public corporation is obligated to include a properly submitted proposal in its management circular and to submit it for a vote at the meeting. Proposals are a less important tactic for shareholder activist campaigns, although they can be used to submit nominations for election to the board.
Shareholder proposals are frequently used to advance environmental, social and governance objectives of shareholders. With the rising expectation of shareholders that companies provide greater transparency and accountability for initiatives concerning climate change and emissions reduction, shareholders have begun using shareholder proposals to compel companies to submit 'say-on-climate' advisory votes to shareholders at annual meetings.5ii Meeting requisitions
Canadian corporate law statutes entitle holders of at least 5 per cent6 of the issued and outstanding shares of a corporation to requisition the directors to call a meeting of shareholders for the purposes set out in the requisition. A requisition may be made by one or more shareholders and must state the business to be transacted at the meeting. Upon receiving the requisition, the directors of the corporation have 21 days to announce the date of the meeting, although they are not required to call the meeting if, for example, the purpose of the requisition does not relate in a significant way to the business or affairs of the corporation or is to address a personal claim or grievance that a shareholder has against the corporation or its directors and officers.
The power to requisition a shareholders' meeting is a powerful tool in the hands of an activist shareholder. Although requisitioned meetings are not frequently held, the ability of an activist to threaten a potential requisition is effective in commanding the attention of management and bringing boards to the table to negotiate with the activist.iii Solicitation of proxies
To solicit proxies, shareholders are generally required to send a dissident's information circular to every shareholder whose proxy is solicited. Two exceptions to this formal solicitation requirement are the 'quiet' solicitation and the public broadcast solicitation.
Quiet solicitations permit a person to solicit up to 15 shareholders without following formal solicitation requirements under Canadian corporate and securities laws. Quiet solicitations are a powerful activist tool as a substantial proportion of votes can typically be solicited by reaching out only to the 15 largest shareholders, even in the case of some of Canada's largest companies. Historically, an activist could use the quiet solicitation to conduct a stealth campaign and ambush the incumbent board at a shareholders' meeting with the dissident nominating its own slate of directors from the floor and support from up to 15 large shareholders. However, the ambush strategy is ineffective where the corporation has adopted a by-law requiring advance notice of director nominations.
Public broadcast solicitations permit an activist to solicit proxies in certain circumstances if the solicitation is conveyed by public broadcast, speech or publication, including, for example, by way of a press release. An activist soliciting by public broadcast must file prescribed disclosure with securities regulators as well as copies of the soliciting material. However, the cost of printing and mailing materials to all shareholders can be avoided with this exemption.
Activists seeking to solicit shareholders broadly may do so by mailing a dissident proxy circular and form of proxy. Dissident proxy circulars have limited disclosure requirements, but if the solicitation relates to the election of directors, then the circular must include biographical information on the dissident's nominees as well as information regarding share ownership and prior regulatory or bankruptcy proceedings. Activists commonly wait until after the company has mailed its circular before completing their dissident circular, in order that they may respond to specific management points in their dissident circular.iv Contacting shareholders
Any person may, on payment of a fee, require that a corporation provide within 10 business days a list setting out the names of the registered shareholders of the corporation, the number of shares owned by each shareholder and their addresses. The requester must swear in an affidavit that use of the list will be limited to matters relating to the affairs of the corporation. A similar request may be made with respect to beneficial shareholders who hold shares indirectly through brokers or other intermediaries; however such a list would contain only shareholders who have not objected to their identity being made known to the corporation.
Although shareholder lists may be readily obtained, many shareholders are difficult to reach directly because they are objecting beneficial owners, whose identities are known only to the brokerage firm or investment adviser through whom they own their shares.v Majority voting
The Toronto Stock Exchange (TSX) requires that each director of an issuer listed on the exchange be elected by a majority of the votes cast in respect of their election. This rule does not apply to contested meetings. As such, issuers are required to adopt a majority voting policy to comply with this rule.
If a director is not elected by at least a majority of the votes cast in respect of his or her election, such director must tender his or her resignation immediately, subject to certain exceptions. Failure to resign could lead to the TSX reviewing the director's qualifications to be a director or officer of other TSX-listed issuers. An issuer is permitted to establish a committee to consider the resignation of the director in question, but such committee would be expected to accept the director's resignation absent exceptional circumstances. Such exceptional circumstances include: the resignation would cause the issuer to be non-compliant with corporate or securities laws; and the director is an important member of an active special committee and the director's resignation would negatively impact the special committee's ability to fulfil its mandate. An issuer may not reject a resignation on the basis of the director's exceptional qualifications or experience.vi Remedies and minority protections
When a shareholder claims that a corporation or its directors or officers have committed some form of wrong, Canadian corporate law statutes provide shareholders two related remedies. The first remedy, the oppression remedy, provides broad protection to minority shareholders from conduct by a corporation and its board that is inconsistent with the reasonable expectations of shareholders. The second, the derivative action, is an extraordinary remedy that allows a shareholder to bring an action in the name and on behalf of a corporation, including against the directors for a breach of their duties to the corporation.
A shareholder may also request that securities regulators intervene where there has been a breach of securities laws or actions not in the public interest. In addition, the securities law regime in Canada establishes certain procedural protections for minority shareholders in connection with transactions where there is a potential for conflicts of interest. Such conflicts may arise because the transaction involves a party that is a 'related party' with a potential informational or other advantage or that is otherwise entitled to receive different consideration. The procedural safeguards include requirements for formal valuations, enhanced disclosure regarding the procedure followed by the board in negotiating the transaction and a requirement that a majority of shareholders who do not have an interest in the transaction vote in favour of it.vii Structural defences
Few structural defences are available to Canadian boards against activists. Canadian public companies generally do not have classified boards, such that all directors are subject to removal at annual shareholder meetings. In addition, the right of shareholders to requisition meetings to remove directors (discussed above) leaves boards exposed to attack even between annual meetings. Majority voting policies even leave incumbent directors at risk of removal in uncontested elections.
The use of shareholder rights plans, or 'poison pills', is closely regulated by Canadian securities regulators. While poison pills can be effective at preventing shareholders from acquiring more than 20 per cent ownership without making a formal takeover offer to all shareholders, securities regulators will not allow them to prevent shareholders from acting as a group with respect to the voting of their shares.
Canadian companies may adopt by-laws requiring advance notice by shareholders of an intention to propose nominees for election. Changes to by-laws may initially be implemented by a board but must subsequently be ratified by shareholders. The adoption of advance notice by-laws has become a corporate governance best practice and Canadian courts have accepted these by-laws as being fair to shareholders by ensuring that they receive advance notice of the existence a proxy contest. Typically, these by-laws require written notice of an intention to nominate a director to be provided at least 30 days prior to the meeting.
Private placements of shares into friendly hands, while uncommon as a defensive tactic, can be effective in shoring up support for the incumbent board, particularly if coupled with voting agreements committing participating shareholders to vote in accordance with the board's recommendations. However, securities regulators in British Columbia and Ontario have rendered decisions indicating that, where there is no non-defensive purpose to a private placement or there are mixed defensive and non-defensive purposes, they will consider whether the public interest requires them to intervene and unwind the private placements in order to protect the interests of shareholders.7 The use of private placements as a defensive tactic may also be challenged by shareholders in the courts under the oppression remedy.
While not a structural defence, companies do have a significant information advantage over activists in a proxy contest. Canadian corporate law allows companies to establish cutoffs for the submission of proxies up to two business days prior to the meeting. While dissident shareholders are required to submit their proxies with the company's transfer agent prior to the cutoff, there is no requirement that the company share the results of the solicitation.viii Influential governance organisations
Although Canada is a large country, with several regional financial centres, the corporate governance community is fairly close-knit, with the result that corporate governance best practices tend to propagate across the country fairly quickly. The Canadian Coalition of Good Governance (CCGG) and the Institute of Corporate Directors are notable governance organisations that are influential in establishing best practices and advocating for their adoption.
The CCGG is a member organisation representing the interests of Canadian institutional investors in matters of corporate governance in Canadian public companies, with the mission of improving alignment of boards and management with the interests of shareholders. In recent years, the CCGG has played an influential role in advocating for majority voting standards for board elections, the adoption of shareholder engagement policies, improved board diversity, and 'say on pay' advisory votes on executive compensation.
MEDAC (Mouvement d'éducation et de défense des actionnaires) is a shareholder rights organisation that has been prolific in submitting shareholder proposals at large Canadian companies promoting improved governance, compensation practices and shareholder accountability.
Global shareholder advisory firms, such as ISS and Glass Lewis, are also well established in Canada and play an influential role in the development of corporate governance best practices and in providing voting recommendations. Many Canadian institutional investors give significant weight to these recommendations and in proxy contests boards and activists devote considerable energy to winning favourable recommendations.