Canada may not be the "promised land" it once seemed for activist investors.
While the country may appear to be more shareholder friendly than the U.S. because of its regulatory regime, the opposite is true, according to Patricia Olasker, a senior partner at Davies Ward Phillips & Vineberg LLP. Ms. Olasker, who became involved in proxy fights through her mergers and acquisitions practice, takes a contrasting view from Canadian investor Stephen Griggs, the co-author of a recent report by data provider Activist Insight.
"Probably two years ago I said the same things about the relative friendliness of the Canada versus the U.S.," Ms. Olasker said, adding that she's completely changed her viewpoint on the topic as a result of acquiring some world experience working alongside Bill Ackman's hedge fund Pershing Square Capital Management – first on Sears Canada, then on Canadian Pacific Railway.
Ms. Olasker said that it's important to debunk the myth that Canada is activist friendly because the idea may influence securities regulation and the way courts look at these cases.
For example, Ms. Olasker takes issue with Mr. Griggs' statement that Canada's early warning system makes it more activist friendly. In Canada, an investor must alert management and other shareholders when a 10-per-cent investment position in a company is amassed, but in the U.S., the declaration is made at just 5 per cent.
The reporting obligation arises at 5 per cent, but a report isn't actually due for 10 days, Ms. Olasker said. This gives investors time to amass a higher stake. "We often see initial reports well over 10 per cent," she said. "In Canada, the 10 per cent is a hard stop, and you're subject to a moratorium [on acquiring more shares] until the report is filed."
In fact, Canada has proposed putting rules in place that would further restrict investors to report at 5 per cent, with a hard stop at that figure. "We may get further clarity from the [Ontario] Securities Commission in late spring," Ms. Olasker said, adding that she hopes the change will not see the light of day.
Ms. Olasker's second point of contention with Canada's system is the ability of investors to force a vote. "A shareholder can generally requisition a shareholder meeting to elect directors if it holds 5 per cent or more of the shares – a practice virtually unheard of in the U.S.," Mr. Griggs writes.
Ms. Olasker doesn't think this rule has proved very useful, due to its attendant restrictions. "The courts have been holding shareholders that requisition meetings to a very high standard of technical compliance, and add new disclosure obligations on to the statutory requirements," she said.
In the past five years, among the TSX companies, there were only 62 requisitioned meetings, and only a few of those resulted in a proxy contest, according to Davies research.
Canada also has strict insider information laws that make it very difficult for an activist to rally support once he or she exceeds a 10 per cent stake. Other shareholders may be afraid of being exposed by the activist to confidential information, which would stop the shareholders from trading, and could put the activist in a position where securities law is breached. In the U.S., selective disclosure laws allow for more flexibility.
But the landscape is changing in Canada. In addition to potential changes to the the early warning system, Ms. Olasker sees 2014 as the year securities regulators start to play a larger role in protecting the shareholder franchise, and outlining company board of director limits. "Their real points of contact with capital markets is either corporate finance or M&A," she said of the regulators, which may explain why they have been relatively quiet on the subject of proxy battles in recent years.
The issue of "vote buying" – where one group pays brokers to vote shares in their favour – could be a topic that the Ontario Securities Commission tackles in 2014. It is an issue that came up in the proxy battle between Agrium Inc. and hedge fund Jana Partners. "That might be the Comission's first opportunity to express a view on appropriate conduct in the context of a proxy fight," Ms. Olasker said.