Shareholder activism: A Canadian perspective
By Curt S. Cumming, President and Chief Financial Officer, Goodwood Inc.
Published: 30 June 2014
Canadians are typically considered to be polite, apologetic and affable, and the fact is, shareholder activism is widely perceived as not very Canadian-like.
Shareholder activism entails engaging management and the Board of an undervalued company with company-specific recommendations which are expected to maximize long term shareholder value. These company-specific strategies may include changes to corporate governance, capital structure, dividend policy or asset composition. Periodically, especially if the company is wholly non-receptive to these suggestions and the activist investor feels they own enough shares and/or will have the support from enough fellow shareholders, the engagement may move into the public domain and perhaps evolve into proxy contests with the goal of seeking to replace certain directors or potentially a full reconstitution of the company’s Board. This investment strategy of proactive engagement with companies in an effort to maximize shareholder value has generated significant returns for shareholders but is not yet widely accepted as an independent asset class in the Canadian marketplace.
We would suggest that there are three key reasons why shareholder activism in Canada will continue to rise and will soon become a more widely accepted alternative asset class for Canadian investors:
1. Structural Environment – the Canadian legal and regulatory environment is more shareholder friendly than other developed economies;
2. Growing Alternative Asset Class – increased capital allocation and greater competition pursuing non-correlated returns;
3. Cultural Paradigm Shift – Canadian institutional and retail investors are increasingly more inclined to enforce their shareholder rights.
Structural Environment – the Canadian legal and regulatory environment is more shareholder friendly than other developed economies
Canadian corporate by-laws and regulatory structure provide investors with an attractive path and framework to pursue an activist agenda. Foreign activist investors have begun to recognize that the Canadian marketplace is a much less litigious and uniquely attractive regulatory environment to pursue activist campaigns. In 2012, Pershing Square Capital Management LP, and JANA Partners LLC pursued very public activist strategies with two iconic Canadian corporations, Canadian Pacific Railway Limited and Agrium Inc., respectively. Foreign and domestic activists will continue to pursue opportunities because of the favourable environment relative to other jurisdictions.
- Shareholder Meetings – Shareholders with a 5% or greater ownership level have the right to requisition a shareholder meeting and table motions for shareholder approval including the removal of Directors and the election of alternative Directors.
- Early Warning Rules – In contrast to the U.S. where investors are required to file early warning reports when they surpass 5% of the issued and outstanding shares, in Canada the threshold is set at 10%. The higher Canadian limit makes it easier for activists to acquire an equity interest prior to the public and the Company’s Board being notified.
- Proxy Solicitation Exemption - In Canada, shareholders can approach and solicit proxies from up to 15 shareholders before filing a dissident proxy information circular.
- No Staggered Boards - In Canada, it is normal practice for each Director to stand for re-election on an annual basis.
- Poison Pills - Canadian securities commissions have generally not allowed the use of a shareholder rights plan as a long-term defence mechanism.
Growing Alternative Asset Class – increased capital allocation and greater competition pursuing non-correlated returns
Investors worldwide continue to transition their asset allocations towards alternative investments in an effort to diversify risk, improve returns and lower correlations amongst their asset allocations. In a 2013 Towers Watson study on seven of the largest developed countries pensions systems, the aggregate alternative asset allocation has grown from 5% in 1995 to almost 20% in 2012. Canada’s largest pensions have been leaders in this trend and have moved to a 23% allocation in 2012.
Investors globally have regularly increased their alternative asset allocation into the activist asset class. Worldwide dedicated activist capital has grown from US$12 billion of assets under management to over US$90 billion in the last 10 years1. In 2013, capital inflows of over US$5 billion2 was a substantial increase from the prior years with increased traditional pension and institutional investor support to activist endeavors. These Investors have been rewarded with outsized returns - the average 2013 activist fund performance was up 17.5% as compared to the HFRI Fund Weighted Composite Index of 9.2%3. Activist Funds have been outperforming the MSCI world index since 20084.
Canadian institutional investors have led the world in alternative asset allocation to classes such as infrastructure, direct private equity and real estate investing but have not yet embraced activism in a scale comparable to their global peers. For the large swath of Canadian investors, both institutional and individual, who do not have the wherewithal to invest with large, well-known U.S. and European activist funds; there is an unsatiated demand for this asset class’ potentially high and uncorrelated returns. Regular and highly publicized activist participation in the Canadian public markets is being noticed by all types of local investors which is furthering the knowledge level and the desire to invest in this asset class.
Cultural Paradigm Shift – Canadian institutional and retail investors are increasingly more willing to enforce their shareholder rights
The global perception of activist investing has evolved substantially over the past 10 years from its early objectionable predatory labels. Investors globally have embraced a broader trend towards good governance and an alignment of interests between shareholders and management teams/Boards and therefore appreciate the role that certain activist investors have come to fill in the marketplace.
Some of Canada’s largest and more mainstream institutional investors are increasingly becoming willing to enforce their shareholder rights and have become more supportive of activist investor agendas. In 2013, a Canadian proxy study completed by Fasken Martineau found that the 101 contests completed in a five-year period ending December 2013 represented an 84% increase over the 55 contests completed in the prior five years. Canadian shareholders in those proxy contests supported the activist agenda in 53.5% of the contests which was not dissimilar from the 54% experienced in the US market5 over the same time period. In a number of highly publicized proxy contests over the past few years, many of the largest Canadian public pensions voted in favour of the activist agenda. Canadian investors are no longer apologetic when it comes to enforcing their shareholder rights, and as a result, activist strategies are on the rise; the cultural paradigm shift is well on its way.
 Source: Preqin Research (12-3-14)
 Source: HedgeFund Research (1-21-14)
 Source: eVestment (2/11/14) and Hedge Fund Research, Inc (1/8/14)
 Source: Activist Insight (2014 Annual Review)
 Source: SharkRepellent.net