All those Canadian stereotypes we cherish – that we’re polite and reasonable – go out the window when it comes to activist battles at major corporations.
In corporate circles, the country’s largest fund managers have established a track record for being distinctly impolite, by steadily increasing their backing for upstart activists in proxy fights against U.S. and Canadian businesses elites. Over the past eight years, leading domestic financial institutions such as Canadian Imperial Bank of Commerce, Bank of Montreal, Royal Bank of Canada and the Caisse de dépôt et placement du Québec emerged as strong supporters of dissidents, according to a recent study by global investment bank Lazard Ltd.
CIBC, BMO, RBC and the Caisse, which each vote billions of dollars worth of shares on behalf of their clients, supported dissidents in anywhere from 48 per cent to 55 per cent of proxy contests over the better part of a decade, including boardroom battles at blue-chip Procter & Gamble and DuPont. Brian Hanson, chief executive of Lazard’s team in Canada, said institutional investors who actively manage their portfolios are increasingly embracing activists as a way to improve performance and separate themselves from passive rivals, such as index funds.
“Passive and active fund managers compete for the same clients, with the passive funds competing on cost, and active managers are becoming increasing vocal in expressing their views to boards, or in public, to differentiate their performance‚” Mr. Hanson said. Major funds that offer passive strategies, such as Fidelity Investments and Vanguard Group, only supported dissident shareholders in 27 per cent and 28 per cent of proxy contests respectively, according to Lazard’s research.
Mainstream fund managers, known in the industry as “long-only" funds, have traditionally been discreet about backing activists by quietly signalling their support for dissidents to boards of directors, Mr. Hanson said. However, a number of Canadian funds are stepping into the spotlight by engaging in public campaigns, including fund manager Letko, Brosseau & Associates Inc.’s successful drive for a richer takeover offer at Transat A.T. Inc. from Air Canada.
Shareholder activism is now spreading from the relatively mature U.S. market into new regions, such as Europe and Japan, and Canadian portfolio managers are part of that international movement as supporters of dissident campaigns, Mr. Hanson said.
Activists typically only own 5 per cent to 10 per cent of a company’s shares, so they rely on support from the remaining shareholders to achieve their goals, which often include selling all or part of the business, or changing the board. A 2017 study led by academics at Duke University found successful activists tend to target companies with relatively low ownership by index funds, because past proxy battles have shown that “active funds are significantly more pro-dissident than passive funds.”
Last year, New York-based Lazard found 187 companies around the world were targeted by activists, down 17 per cent from 2018’s record but in line with multiyear average levels. In 99 of these campaigns, the activists pushed for the company to be put up for sale. The study showed 3 per cent of the companies targeted were based in Canada, which is on par with the domestic capital market’s size compared to the global economy.
Dissident investors deployed approximately US$42-billion, and 4 per cent of this total, or US$1.7-billion, was earmarked for dissident campaigns against Canadian companies, according to Lazard. The biggest domestic showdowns saw activists wage unsuccessful proxy contests at Calgary-based TransAlta Corp. and Montreal’s Knight Therapeutics Inc.
While domestic institutions have shown they are more than willing to support activist campaigns, lawyers say tactics that work in the U.S. market need to be refined when targeting a Canadian company. In a study of successful and failed domestic campaigns, lawyers Patricia Olasker and Alex Moore at Davies Ward Phillips & Vineberg LLP said: “U.S.-style political campaign tactics and ad hominem attacks do not play well in Canada and Canadian nominees on the activist’s slate may insist that a less aggressive tone be taken in communications."
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Andrew Willis