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Overview

While Canadian corporate and securities laws have provided shareholders with robust rights for many decades, in the past 10 to 15 years, 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, most recently, to push for improved environmental, social and governance (ESG) practices. At the same time, and particularly since the 2008 and 2009 financial crisis, shareholders have increasingly resorted to proxy contests, or wielded threats to do so, to effect governance changes.

Pershing Square Capital Management’s (Pershing Square) overwhelming proxy contest victory at Canadian Pacific Railway (Canadian Pacific) in 2012 marked a paradigm shift in the relative power dynamic of boards and shareholders. Generally, Canadian boards have learnt to keep better tabs on shareholder sentiment and have become more sophisticated in understanding how to deal with an activist attack. Shareholder revolts are more likely to be dealt with swiftly, as was the case in the settlements in 2022 and 2023 at Canadian National Railway (CN) and Suncor Energy Inc (Suncor), as discussed below.

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, the Canadian legal regime takes a lighter regulatory approach with respect to shareholder rights in numerous respects, allowing shareholders to act more freely and at lesser expense 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 directors’ duties, 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 where securities regulators perceive actions 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 shareholders’ meetings. Generally, the only prerequisite to submitting a proposal is that the proposer be entitled to vote at shareholders’ meetings.4 A public corporation must include a properly submitted proposal in its management circular and 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 ESG objectives of shareholders. In recent years, shareholders have begun using shareholder proposals to compel companies to submit say-on-climate advisory votes to shareholders at annual meetings.5

ii Meeting requisitions

Holders of at least 5 per cent6 of the issued and outstanding shares of a corporation may requisition the directors to call a meeting of shareholders for the purposes set out in the requisition. This right is mainly used to remove and replace directors. Upon receiving the requisition, the directors of the corporation have 21 days to announce the date of the meeting.

The power to requisition a shareholders’ meeting is a powerful tool in the hands of an activist shareholder. Although requisitioned meetings are not held frequently, an activist’s ability to threaten a requisition is effective in commanding the attention of management and bringing boards to the table to negotiate.

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 ‘quiet’ solicitations and public broadcast solicitations.

Quiet solicitations permit the solicitation of 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 to only the 15 largest shareholders, even in the case of some of Canada’s largest companies.

Public broadcast solicitations permit an activist to solicit proxies 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 so that they may respond to specific management points in their dissident circular.

iv Contacting shareholders

For a modest fee, any person may obtain from a corporation its list of registered shareholders, including contact information and share ownership. 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 which they own their shares.

v Majority voting

Rules of the Toronto Stock Exchange (TSX) require listed companies to have ‘majority voting’ policies requiring that directors be elected by a majority of the votes cast in respect of their election. The rule does not apply to contested meetings.

If a director is not elected by at least a majority of the votes cast in respect of their election, a majority voting policy requires the director to tender their 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 limited exceptional circumstances.

Under the Canada Business Corporations Act (CBCA) rules that came into force in August 2022, directors receiving less than majority support from shareholders in an uncontested election are not elected as a matter of law, eliminating the need to rely on director resignations for CBCA companies. Unlike the TSX requirements, the CBCA majority voting rules apply to majority-controlled companies.

vi Remedies and minority protections

Canadian corporate law statutes provide shareholders with two related remedies to address shareholder governance complaints. 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 remedy, the derivative action, is an extraordinary measure 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 that are not in the public interest. In addition, the securities law regime in Canada establishes certain procedural protections for minority shareholders in transactions where there is 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 disinterested shareholders 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, and majority voting policies 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 best practice. Canadian courts have accepted these by-laws as being fair to shareholders by ensuring that they receive advance notice of the existence of a proxy contest.7 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.

While uncommon as a defensive tactic, private placements of shares into friendly hands 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, British Columbia and Ontario regulators 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.8 The use of private placements as a defensive tactic may also be challenged by shareholders in the courts under the oppression remedy. Furthermore, recent guidance published by the TSX limits the protections afforded by voting agreements going forward for TSX-listed issuers.9 The TSX will review voting agreements in connection with its review of transactions that require acceptance under TSX Listing Rules. The TSX will generally accept voting agreements if (1) the issuer obtains disinterested security holder approval for the voting agreement or (2) the voting agreement allows a covenanting security holder to abstain or not participate in a vote. In deciding whether to accept a voting agreement, the TSX considers certain factors to determine whether it would materially affect control of the issuer.

While not a structural defence, companies have a significant information advantage over activists in a proxy contest. Canadian corporate law allows companies to establish cut-offs for the submission of proxies up to two business days prior to the meeting. Dissident shareholders are required to submit their proxies with the company’s transfer agent prior to the cut-off, but there is no requirement that the company share the results of the solicitation.

viii Influential governance organisations

Canada’s corporate governance community is fairly close-knit. The result is that corporate governance best practices tend to propagate across the country 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.

MÉDAC (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 Institutional Shareholder Services (ISS) and Glass, Lewis & Co (Glass Lewis), are also well established in Canada and play an influential role in the development of corporate governance best practices and providing voting recommendations. Many Canadian institutional investors give significant weight to these recommendations, and boards and activists devote considerable energy to winning favourable recommendations in the context of proxy contests.