Rise in Canadian shareholder activism faces test next month with new rules in place

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TORONTO, Feb 12 – A recent rise in Canada’s shareholder activism faces a reality check next month when a new law that gives more powers to investors to pick board nominees will be put to the test and could spur more campaigns this year, lawyers say.

Canada is a perfect environment for activists with advantageous regulatory rules, but has failed to attract huge swathes of activists to its shores.

The country has lagged the rising trend of activism seen globally, but that could be about to change, lawyers say. Some 53 Canadian companies faced activism campaigns in 2022, a 17.8% rise over the previous year, compared with a 10.6% rise in the U.S to 511, showed data from Insightia, a Diligent brand.

Last August, Canada changed federal laws allowing investors to vote ‘for’ or ‘against’ each director nominated to a company board. Previously, shareholders could only vote ‘for’ a candidate or ‘withhold’ their vote, meaning a majority was not legally a necessity.

While not enshrined in law, majority voting was often adopted by companies in their policy, prior to the change. But directors previously faced no legal requirement to resign if they did not secure a majority of ‘for’ votes, said lawyers.

“If I were an activist, this makes things easier,” said Heidi Reinhart, partner at Norton Rose Fulbright.

Reinhart said if an investor now calls for an ‘against’ campaign and secures enough votes, the person doesn’t get elected. “So, I think there will be more targeted campaigns against specific directors. That gives some leverage to a shareholder,” Reinhart added.

While the rule change came in August, lawyers point out this is the first proxy season where the amendment will be tested.

Next month, in activist campaigns from Luxor Capital Group and Sandpiper Group against Ritchie Bros Auctioneers (RBA.TO) and First Capital Real Estate Investment Trust (REIT) (FCR_u.TO), respectively, both will face the scrutiny of fellow investors.

Luxor is opposing Ritchie Bros’ $6 billion acquisition of IAA Inc (IAA.N) while Sandpiper is aiming to overhaul First Capital REIT’s board.

Activist hedge funds are likely to be further emboldened after bets on M&A deals globally landed them an outsized 8.5% gain in January, making them the best-performing strategy for the month, after losing 17.23% on average in 2022, showed data from Hedge Fund Research.

When it comes to wins and losses, however, only 22% of public activist demands in Canada were at least partially satisfied in 2022, lower than 26% in the U.S. and 34.1% in Europe, according to Insightia.

Canadian campaigns were more successful in the preceding four years, with a rate of 34% in 2021 and 43% in 2018.

A pick up in activism is expected to not only increase transparency on deals, but drive stock performance.

In the case of Elliott Investment Management calling for a strategic review and board changes at Suncor Energy Inc (SU.TO), for example, the stock has risen 56% since the activist first announced its involvement in April.

By contrast, Canadian energy stocks (.SPTTEN) rose 3.14% over the same period.

And oil and mining companies could continue to be the sector that faces activism, say market participants.

“There are a lot of resource companies and those sectors are often face dislocation and they’re often people that are facing challenges in their business,” said Adam Givertz, partner at law firm Paul Weiss.

“Those challenges, if they’re a good company, can attract the attention of an activist.”

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