Shareholder activism hit record highs in Canada during 2018 and, while the activity has trailed off somewhat this year, speakers at the inaugural Corporate Secretary Think Tank – Canada cautioned that there is an increase in first-time activists.
In 2018 there were 78 activist campaigns in Canada, 57 of which had taken place by July, according to data from Activist Insight. In 2019, 28 companies had been targeted by July – marking a 40 percent year-on-year decrease in activity.
Some of the most defining contested scenarios of last year – such as the proxy fights at Detour Gold, Hudbay Minerals and Crescent Point Energy – were either led or defined by investors that wouldn’t have traditionally been considered as activists.
‘We have situational activism here,’ said Amy Freedman, chief executive officer of Kingsdale Advisors. ‘Anyone can be an activist. It’s important that you know who is voting your shares and that you understand the nature of activists in the US, domestically and overseas.’
Walied Soliman, global chair of Norton Rose Fulbright, agreed, encouraging the audience to take shareholder letters seriously. ‘What you do with inbound shareholder letters determines whether or not [the writers] become activists,’ he said.
Soliman and Freedman agreed that it’s essential for issuers to have a robust shareholder engagement strategy to mitigate the risks of activism.
During a contest
During 2018 there was also a record number of proxy contests concerning board seats, with 18 contests going all the way to a proxy meeting, according to Activist Insight. This was a marked increase from the 10 proxy contests in 2017, the eight in 2016 and the single contest in 2015. By July 2019 there had been five contests.
The picture for settlements around board seats is more static, with 32 settlements in 2017, 34 in 2018 and 16 between January and July 2019.
But with the specter of shareholders acting as first-time activists, or traditional shareholders siding with activists, it’s less predictable whether a campaign will run all the way to the annual meeting, Soliman noted.
Freedman said it was the responsibility of governance professionals to ensure their board is aware of any potential governance vulnerabilities that could make it an attractive target for activists. ‘Be a conduit to the board,’ she said.
Soliman agreed, saying that corporate secretaries and governance professionals can play a crucial role in a contested situation. ‘Every campaign has two components,’ he said. ‘There’s always a substantive reason for a campaign. But every fight also has a moral narrative – it needs to be about CEO pay or governance in some capacity. In this room, you are the gatekeepers of the moral narrative.’
Freedman further stressed the need to take activist campaigns seriously, even if the activist isn’t ultimately successful. When it comes to a vote, she said, ‘51 percent is a not a win’.
The threat of short-sellers
Soliman also warned that Canada is attractive to short-sellers, describing it as an ‘alarming trend’. He suggested that the Canadian Securities Administrators, Canada’s financial regulators, need to intervene to prevent the release of short reports that often contain lies.
Too often, Soliman noted, the advice to issuers after being targeted with a short report is to sue the firm that initiated the attack. ‘That’s exactly what it wants – a long, protracted, high-profile legal process where it can say whatever it wants,’ he said.
One attendee who had held in-house positions at two large Canadian issuers outlined the nature of information that can be contained in short reports. In one instance, the short-seller highlighted that a company’s CEO had spent several years working for McKinsey and that Enron’s CEO had also worked for McKinsey. The intent was to tarnish the reputation of the under-fire CEO by likening him to one rogue former McKinsey employee. ‘How do you even begin to contest that?’ the attendee asked.
While there was no clear solution about how to handle a short report in the moment, several attendees came back to the maxim that a robust shareholder engagement plan will help mitigate some of the impact.
According to Activist Insight, 22 Canadian companies were targeted by short-sellers in 2018, while activity has been significantly less in 2019.
