Canada has long been a popular destination for American investors looking to gain foreign exposure for their portfolios, and for American companies setting up or acquiring a business in a stable market that is close to home. Recent years have provided especially favourable conditions for coming to Canada, as the economy has benefited from a resource boom, government budget surpluses and a strong stock market. Significantly, M&A activity in Canada has been making and breaking records on a regular basis, and American acquirors have been major players in this development.
As is the case when embarking on any foreign venture, however, forewarned is forearmed. While Canada offers corporate and securities laws that will be familiar to Americans, it also features important differences that can sometimes provide unexpected surprises. Canadian investors have traditionally been more restrained in their activism than their American counterparts, but this difference may be narrowing. In addition, they have tools available to them that provide wider latitude in asserting their rights than an American investor might expect.
Canadian business corporations statutes permit any shareholder to submit a proposal to the corporation about a matter the shareholder wishes to raise at a shareholder meeting. If the shareholder proposal meets certain criteria, the directors must include it in the management information circular and proxy solicitation. A shareholder proposal may cover a wide range of issues, including making, amending or repealing a by-law.
Shareholders Effect Corporate Change
American investors will be familiar with the right of shareholders to submit proposals; however, they may be less familiar with some unique aspects of Canadian shareholder proposals. If the shareholders adopt a proposal to make, amend or repeal a by-law, Canadian corporate law requires the corporation to enact the proposal, allowing the shareholders to effect corporate change. In addition, shareholders who represent 5% of voting equity may initiate proposals including nominations for the election of directors. This power is significant because it allows shareholders to use the management information circular and proxy solicitation in support of their nominees.
Unlike U.S. companies, Canadian corporations do not typically use advance notice by-laws to limit shareholders’ rights to make proposals and director nominations. In the U.S., advance notice by-laws require shareholders to present proposals and nominations well in advance of the shareholder meeting.
Merely exercising these rights does not, of course, translate into success; without the support of a majority bloc, activist shareholders cannot institute a change in corporate direction or leadership. Yet possessing these rights does enable minority shareholders to agitate and draw attention to issues of importance to them and potentially gives them a degree of influence over a board that may be absent in the American context.
A Bidder-Friendly Environment
Minority shareholders can also require directors to convene a shareholder meeting for any purpose, including removing directors—again, provided their requisition for a meeting meets certain criteria and they command at least 5% of the corporation’s voting shares. If the directors fail to do so, the shareholders may call the meeting on their own and, as long as they act in good faith, they are entitled to reimbursement for all reasonable expenses associated with requisitioning, calling and holding the meeting.
The right of shareholders who represent at least 5% of voting equity to compel a shareholder meetingto remove directors undermines certain defensive tactics that are typical in the U.S. For example, in the U.S., the use of “staggered” (or “classified”) boards discourages hostile bids and proxy contests. American law protects such boards against removal by shareholders, who can only call a special meeting if authorized to do so by the certificate of incorporation or by-laws. In Canada, staggered boards offer no real defence because shareholders may requisition meetings to replace directors at any time. This obviously creates a more fluid dynamic when the control of a company is contested: in Canada, hostile bids can often succeed much more quickly than in the U.S.
The difference in the control a board has over a company is further reinforced by the way in which shareholder rights plans (poison pills) are treated in the two countries. Rights plans in both countries operate to dilute an acquiror who obtains more than a specified percentage of a corporation’s stock without the consent of the target corporation’s board of directors, making an acquisition above the specified threshold economically impracticable. Yet in Canada, rights plans tend to be a weaker defensive tool than in the U.S. In Canada, rights plans are challenged before provincial securities commissions, which have demonstrated a preference for giving the target corporation’s shareholders the opportunity to decide whether to accept the acquiror’s offer. Boards are in effect not permitted to “just say no”. As a result, the commissions will only allow a rights plan to remain in place for a limited period to give the target corporation’s board time to solicit a superior offer. In the U.S., rights plans are challenged before the courts, which have shown a willingness to allow them to remain in place. This significant difference has lead some commentors to suggest Canada is a much more bidder-friendly environment to a hostile bidder than the U.S.