If Canadian in-house counsel did not feel overwhelmed enough in their role protecting their companies’ interests, a new threat reached their radar screens over the course of the past year: shareholder activism.
A long list of high-profile and sophisticated institutional shareholders — such as the Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board, and British Columbia Investment Management Corp. — mobilized to attack Magna International Inc.’s dual-class share capital transaction. Other examples of this growing trend include actions by Carl Icahn, who has made several acquisitions of positions in the market and has shown a willingness to make hostile takeover bids of companies where change could add value; and West Face Capital, which launched a hostile proxy contest to replace the directors of Maple Leaf Foods Inc. And those represent just the tip of the iceberg in terms of the mass of activity that has seen emboldened shareholders exercise their rights more aggressively. Canada’s mining sector has been particularly susceptible to activist shareholder actions.
“This is a very important issue, and I think it’s here to stay,” says Emmanuel Pressman, co-chairman of Osler Hoskin & Harcourt LLP’s mergers and acquisitions specialty group. “There are lots of illustrations of it in the market, and there are more to come.”
Alison Love, Enbridge Inc.’s vice-president, corporate secretary, and chief compliance officer, says investors are clearly becoming more aware of the opportunities they have to exercise their rights and bring issues to management’s attention. At the same time, groups promoting shareholder rights now have the capacity to get more involved. With that said, in-house counsel have a big role to play in helping their companies effectively manage the new world of shareholder activism. “Companies don’t want to have to put many shareholder proposals to votes at the annual meeting,” explains Love. “They would like to resolve as many as possible. In addition, companies want to be seen to be working well with shareholders, and want to try to accommodate the best interests of shareholders. So you obviously want to put your best foot forward with all your shareholders.”
Love emphasizes the importance of adequate handling of shareholder activism by noting what she calls the “social license” that companies are increasingly operating under. Accordingly, the biggest risk they face is with regard to their reputation, she says. She points to BP’s Deepwater Horizon oil spill in the Gulf of Mexico last year as an example. “There was a huge and immediate decrease in the value of its shares, probably greater than the cost of that cleanup,” says Love. “So the negative reputational impact is huge, and can be totally destructive.”
Some companies deal with such reputational threats better than others. Take Maple Leaf Foods’ effective handling of the 2008 listeriosis outbreak in one of its plants in Toronto. “The CEO [Michael McCain] stood up right from the get-go and said, ‘We’re taking responsibility for this. We’re going to make sure it never happens again, and we’re going to compensate the people whose lives have been affected,’” explains Love.
Her company has itself felt the impact of the rise in shareholder activism in Canada, and the potential reputational damage that comes along with it. She uses Enbridge’s Northern Gateway Pipeline project — which will see a twin pipeline system run from near Edmonton to a marine terminal in Kitimat, B.C. — as an example. The project has not only engaged shareholders, but general stakeholders as well. “In that, in-house counsel are very involved in a lot of negotiations with First Nations and other groups
in British Columbia, as well as some
investor groups who are similarly interested in the issues that have been brought forward by those First Nations groups and non-governmental organizations,” explains Love. “So some of those are stakeholder issues, and some of them are shareholder activism.”
Like many Canadian companies, Enbridge has also recently faced a rising number of issues brought forward via shareholder proposals for annual meetings. “The list of issues that are brought forward in shareholder proposals is huge,” she says. But Love and her colleagues have learned to manage that onslaught. They have done so at times by meeting with shareholders before the annual meetings to find ways to come to agreements — with, for example, disclosure provisions — that allow the issues to be resolved before the shareholder meeting.
To be sure, the role of in-house counsel is crucial when it comes to shareholder activism. Love says their role begins when a shareholder submits correspondence detailing a proposal. The member of the legal team taking charge of the file — whether general counsel, corporate secretary, or another member of the in-house team — would then communicate it to other senior management and other members of the business team who will become engaged in the issue. In-house counsel will also often attempt to arrange a meeting with the shareholder, or shareholder group, to see if it’s possible to negotiate or resolve the issue before the shareholder meeting. The lawyer will also be charged with drafting correspondence between the parties. If a resolution cannot be reached, the in-house counsel will also work to draft the response to the proposal as it appears in the proxy circular.
Perhaps most importantly, it’s essential for in-house counsel to be open and available for shareholders, she says. That means providing contact information and responding to shareholder inquiries promptly. “You can’t be delayed for a month in getting back to somebody,” she explains. “You have to be as responsive as you can be in the circumstances.”
Osler’s Pressman identifies three types of activist shareholders that in-house counsel must learn to identify. He refers to the most common type of activists as “value maximizers.” This group consists of the more conventional shareholder activists, such as hedge funds, investors, and other value-drivers looking to get the most out of their investments. They will carefully examine companies’ capital structures, balance sheets, stock prices, and conduct financial analysis. “They might pile into a stock on the basis that they think that they can instigate change that creates more value,” explains Pressman. “Or they may be a pre-existing shareholder or investor who doesn’t like the direction of the stock price and in combination with its analysis of the financial climate, may say it’s time to instigate some change here; our stock price hasn’t moved, and we think we can do a better job.” So these value maximizers are essentially looking for ways to enhance the value of their investments. They do so by attempting to put a company up for sale, encouraging a company to take on debt in a low-interest-rate environment in order to declare big stock dividends, or execute other recapitalization transactions, says Pressman. They may also simply take an opposing view to the business plan of the existing board, and seek to install those who represent their own views.
While value maximizers are the typical type of shareholder activists, Pressman believes it’s important for in-house counsel to take a wider view of potential activists. He refers to another group as “corporate governance watchdogs.” This group will carefully examine how independent a board is and how executives are compensated. Examples include the Canadian Coalition for Good Governance, proxy advisory firms such as Institutional Shareholder Services Inc. and Glass Lewis & Co. “Although they may not be what I call classic activists, they inform the activist environment,” explains Pressman. Even media organizations that report on the business community and rank publicly traded companies based on factors such as their board composition, independence, and executive pay practices can be included in this group, he adds. “This all affects corporate reputation, and it affects, quite frankly, stock price performance,” he says. “People have to be very mindful of corporate governance activism.”
Pressman refers to his final category of shareholder activism as “corporate activism and activism as it affects matters related to social responsibility and responsible corporate behaviour.” Again, all of those aspects have a significant impact on a company’s reputation. “There are shareholders who are very concerned with how companies conduct themselves internationally, how they respect the environment, how their boards and management teams are represented as a matter of ethnic and gender diversity,” he notes. “They vote at director elections, and they’re articulate, and they have very legitimate interests.”
Meanwhile, Pressman says there are many players within corporations that have a role to play in managing the issues brought forth by these three types of activists. But perhaps even more importantly, they must endeavour to anticipate the types of issues that might attract shareholder activism. Investor relations personnel are best positioned to be aware of market activity, as they have regular contact with financial analysts and are often on the road speaking with investors. The finance department knows what the business strategy is, and has a direct line to the CEO and the execution of business strategy.
The general counsel, meanwhile, must partner with those two departments when it comes to managing shareholder activism, says Pressman. “Counsels are especially capable of understanding and handicapping risk, and at understanding compliance issues and having a more generalist, broader outlook than others may have,” he says. “Partnering with these other groups is very important, and will assist each of those groups, as well as the board, when it comes time to having to respond to particular activism.”
Moreover, in-house counsel must keep the board and management team up to date on trends and developments in the market, he adds. That role is enhanced by the knowledge gained by partnering with finance and investor relations, which can then be transferred by the GC to the executive levels. “A board needs to be involved; it doesn’t want to be caught off guard when activism bubbles up,” notes Pressman. “A general counsel certainly doesn’t want its board to learn about an activist agenda in the daily newspaper.”
Edward Waitzer, who leads Stikeman Elliott LLP’s corporate governance group, notes that the rise in shareholder activism has increased the frequency of meetings among boards of directors or top-level directors and major shareholders. He points out that in-house counsel have a “huge role” in ensuring there are no misunderstandings over the course of such meetings. “You want to make sure that there’s clarity over who said what, and that there’s compliance with securities law,” says Waitzer. The most obvious task for counsel is to ensure selective disclosure provisions are followed. “You can’t have these meetings and have some shareholders being told things that the market isn’t being told,” he notes. “That either creates a situation where they are kind of giving up their liquidity rights in order to meet with management, or they’re subject to potential insider trading.” Accordingly, in-house counsel should attend any such meetings to ensure clarity and that rules are followed.
Waitzer also highlights the role of in-house counsel in situations where a shareholder group wants to influence the company’s direction, and perhaps put it in play. He references his work for BCE when Teachers’ — its largest shareholder — essentially walked in and said it believed the company should be sold. “As soon as they disclosed their intention to sell, the company was for sale,” explains Waitzer. “We then had to figure out what to do about that, and try to maximize value for everybody. But they made the decision, not the board of BCE.” The same scenario could arise with any major pension fund or hedge fund, and with regard to various types of issues that relate to a company’s direction going forward. Whatever the situation, counsel’s role begins by essentially determining where the rights of shareholders lie, and at what point the responsibilities of boards and management teams take over.
“We have this curious situation in corporate law where shareholders have rights, but no responsibilities,” notes Waitzer. “Shareholders can say whatever they want to say, and do whatever they want to do with their shares. If they’re an institutional investor, they may have obligations to their beneficial owners, but they don’t have any obligations to the company. Directors and management, on the other side, have rights and responsibilities. Ultimately, they’re subject to an obligation to act in the best interests of the corporation.” That means the role of in-house counsel is to ensure all players understand their rights and responsibilities. That can become difficult when the dynamics of the situation create hostility, Waitzer suggests, or when tightened time frames present themselves. “The legal issues become, as is often the case in corporate law, judgment calls,” he adds.
David Surat, counsel with Borden Ladner Gervais LLP’s securities and capital markets group, says in-house counsel should expect shareholders to take advantage of activist techniques with any significant transaction, such as a merger and acquisition. This became apparent in examples such as the bid in opposition to the merger of the Toronto Stock Exchange and London Stock Exchange, which was spearheaded by a group of major banks and pension funds. “If you are planning a significant transaction, the lesson is that you’ve got to try to anticipate the tactics someone might take if they come out of the woodwork, or someone you already know about,” says Surat.
At the same time, Surat does not believe shareholder activism in Canada will overnight become as prevalent as it is in the United States. “If you look back over the last couple of years, there’ve been a lot of people saying shareholder activism is coming, things are changing,” he says. “I think to a certain extent that’s true, but it may have been somewhat overstated. I don’t think there’s been a revolutionary change in the way things happen, but I do think the level of scrutiny that boards are being put under, and the amount of focus of shareholders on their ability to influence corporate decisions, has certainly risen. I think boards are much more focused on potential responses of shareholders to any action that’s taken.”
Nonetheless, there appears to be clear consensus from those in the corporate legal community that shareholder activism in Canada is no fad. That means it would be imprudent of in-house counsel to fail to do their homework on the trend. “I don’t think it’s a flash in the pan,” says Enbridge’s Love. “It is an increasingly important issue for companies, and lots of companies are putting the resources that are required into their communication with shareholders in this area.”
A long list of high-profile and sophisticated institutional shareholders — such as the Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board, and British Columbia Investment Management Corp. — mobilized to attack Magna International Inc.’s dual-class share capital transaction. Other examples of this growing trend include actions by Carl Icahn, who has made several acquisitions of positions in the market and has shown a willingness to make hostile takeover bids of companies where change could add value; and West Face Capital, which launched a hostile proxy contest to replace the directors of Maple Leaf Foods Inc. And those represent just the tip of the iceberg in terms of the mass of activity that has seen emboldened shareholders exercise their rights more aggressively. Canada’s mining sector has been particularly susceptible to activist shareholder actions.
“This is a very important issue, and I think it’s here to stay,” says Emmanuel Pressman, co-chairman of Osler Hoskin & Harcourt LLP’s mergers and acquisitions specialty group. “There are lots of illustrations of it in the market, and there are more to come.”
Alison Love, Enbridge Inc.’s vice-president, corporate secretary, and chief compliance officer, says investors are clearly becoming more aware of the opportunities they have to exercise their rights and bring issues to management’s attention. At the same time, groups promoting shareholder rights now have the capacity to get more involved. With that said, in-house counsel have a big role to play in helping their companies effectively manage the new world of shareholder activism. “Companies don’t want to have to put many shareholder proposals to votes at the annual meeting,” explains Love. “They would like to resolve as many as possible. In addition, companies want to be seen to be working well with shareholders, and want to try to accommodate the best interests of shareholders. So you obviously want to put your best foot forward with all your shareholders.”
Love emphasizes the importance of adequate handling of shareholder activism by noting what she calls the “social license” that companies are increasingly operating under. Accordingly, the biggest risk they face is with regard to their reputation, she says. She points to BP’s Deepwater Horizon oil spill in the Gulf of Mexico last year as an example. “There was a huge and immediate decrease in the value of its shares, probably greater than the cost of that cleanup,” says Love. “So the negative reputational impact is huge, and can be totally destructive.
”Some companies deal with such reputational threats better than others. Take Maple Leaf Foods’ effective handling of the 2008 listeriosis outbreak in one of its plants in Toronto. “The CEO [Michael McCain] stood up right from the get-go and said, ‘We’re taking responsibility for this. We’re going to make sure it never happens again, and we’re going to compensate the people whose lives have been affected,’” explains Love.
Her company has itself felt the impact of the rise in shareholder activism in Canada, and the potential reputational damage that comes along with it. She uses Enbridge’s Northern Gateway Pipeline project — which will see a twin pipeline system run from near Edmonton to a marine terminal in Kitimat, B.C. — as an example. The project has not only engaged shareholders, but general stakeholders as well. “In that, in-house counsel are very involved in a lot of negotiations with First Nations and other groups in British Columbia, as well as some investor groups who are similarly interested in the issues that have been brought forward by those First Nations groups and non-governmental organizations,” explains Love. “So some of those are stakeholder issues, and some of them are shareholder activism.”
Like many Canadian companies, Enbridge has also recently faced a rising number of issues brought forward via shareholder proposals for annual meetings. “The list of issues that are brought forward in shareholder proposals is huge,” she says. But Love and her colleagues have learned to manage that onslaught. They have done so at times by meeting with shareholders before the annual meetings to find ways to come to agreements — with, for example, disclosure provisions — that allow the issues to be resolved before the shareholder meeting.
To be sure, the role of in-house counsel is crucial when it comes to shareholder activism. Love says their role begins when a shareholder submits correspondence detailing a proposal. The member of the legal team taking charge of the file — whether general counsel, corporate secretary, or another member of the in-house team — would then communicate it to other senior management and other members of the business team who will become engaged in the issue. In-house counsel will also often attempt to arrange a meeting with the shareholder, or shareholder group, to see if it’s possible to negotiate or resolve the issue before the shareholder meeting. The lawyer will also be charged with drafting correspondence between the parties. If a resolution cannot be reached, the in-house counsel will also work to draft the response to the proposal as it appears in the proxy circular.
Perhaps most importantly, it’s essential for in-house counsel to be open and available for shareholders, she says. That means providing contact information and responding to shareholder inquiries promptly. “You can’t be delayed for a month in getting back to somebody,” she explains. “You have to be as responsive as you can be in the circumstances.”
Osler’s Pressman identifies three types of activist shareholders that in-house counsel must learn to identify. He refers to the most common type of activists as “value maximizers.” This group consists of the more conventional shareholder activists, such as hedge funds, investors, and other value-drivers looking to get the most out of their investments. They will carefully examine companies’ capital structures, balance sheets, stock prices, and conduct financial analysis. “They might pile into a stock on the basis that they think that they can instigate change that creates more value,” explains Pressman. “Or they may be a pre-existing shareholder or investor who doesn’t like the direction of the stock price and in combination with its analysis of the financial climate, may say it’s time to instigate some change here; our stock price hasn’t moved, and we think we can do a better job.” So these value maximizers are essentially looking for ways to enhance the value of their investments. They do so by attempting to put a company up for sale, encouraging a company to take on debt in a low-interest-rate environment in order to declare big stock dividends, or execute other recapitalization transactions, says Pressman. They may also simply take an opposing view to the business plan of the existing board, and seek to install those who represent their own views.
While value maximizers are the typical type of shareholder activists, Pressman believes it’s important for in-house counsel to take a wider view of potential activists. He refers to another group as “corporate governance watchdogs.” This group will carefully examine how independent a board is and how executives are compensated. Examples include the Canadian Coalition for Good Governance, proxy advisory firms such as Institutional Shareholder Services Inc. and Glass Lewis & Co. “Although they may not be what I call classic activists, they inform the activist environment,” explains Pressman. Even media organizations that report on the business community and rank publicly traded companies based on factors such as their board composition, independence, and executive pay practices can be included in this group, he adds. “This all affects corporate reputation, and it affects, quite frankly, stock price performance,” he says. “People have to be very mindful of corporate governance activism.”
Pressman refers to his final category of shareholder activism as “corporate activism and activism as it affects matters related to social responsibility and responsible corporate behaviour.” Again, all of those aspects have a significant impact on a company’s reputation. “There are shareholders who are very concerned with how companies conduct themselves internationally, how they respect the environment, how their boards and management teams are represented as a matter of ethnic and gender diversity,” he notes. “They vote at director elections, and they’re articulate, and they have very legitimate interests.”
Meanwhile, Pressman says there are many players within corporations that have a role to play in managing the issues brought forth by these three types of activists. But perhaps even more importantly, they must endeavour to anticipate the types of issues that might attract shareholder activism. Investor relations personnel are best positioned to be aware of market activity, as they have regular contact with financial analysts and are often on the road speaking with investors. The finance department knows what the business strategy is, and has a direct line to the CEO and the execution of business strategy.
The general counsel, meanwhile, must partner with those two departments when it comes to managing shareholder activism, says Pressman. “Counsels are especially capable of understanding and handicapping risk, and at understanding compliance issues and having a more generalist, broader outlook than others may have,” he says. “Partnering with these other groups is very important, and will assist each of those groups, as well as the board, when it comes time to having to respond to particular activism.”
Moreover, in-house counsel must keep the board and management team up to date on trends and developments in the market, he adds. That role is enhanced by the knowledge gained by partnering with finance and investor relations, which can then be transferred by the GC to the executive levels. “A board needs to be involved; it doesn’t want to be caught off guard when activism bubbles up,” notes Pressman. “A general counsel certainly doesn’t want its board to learn about an activist agenda in the daily newspaper.”
Edward Waitzer, who leads Stikeman Elliott LLP’s corporate governance group, notes that the rise in shareholder activism has increased the frequency of meetings among boards of directors or top-level directors and major shareholders. He points out that in-house counsel have a “huge role” in ensuring there are no misunderstandings over the course of such meetings. “You want to make sure that there’s clarity over who said what, and that there’s compliance with securities law,” says Waitzer. The most obvious task for counsel is to ensure selective disclosure provisions are followed. “You can’t have these meetings and have some shareholders being told things that the market isn’t being told,” he notes. “That either creates a situation where they are kind of giving up their liquidity rights in order to meet with management, or they’re subject to potential insider trading.” Accordingly, in-house counsel should attend any such meetings to ensure clarity and that rules are followed.
Waitzer also highlights the role of in-house counsel in situations where a shareholder group wants to influence the company’s direction, and perhaps put it in play. He references his work for BCE when Teachers’ — its largest shareholder — essentially walked in and said it believed the company should be sold. “As soon as they disclosed their intention to sell, the company was for sale,” explains Waitzer. “We then had to figure out what to do about that, and try to maximize value for everybody. But they made the decision, not the board of BCE.” The same scenario could arise with any major pension fund or hedge fund, and with regard to various types of issues that relate to a company’s direction going forward. Whatever the situation, counsel’s role begins by essentially determining where the rights of shareholders lie, and at what point the responsibilities of boards and management teams take over.“
We have this curious situation in corporate law where shareholders have rights, but no responsibilities,” notes Waitzer. “Shareholders can say whatever they want to say, and do whatever they want to do with their shares. If they’re an institutional investor, they may have obligations to their beneficial owners, but they don’t have any obligations to the company. Directors and management, on the other side, have rights and responsibilities. Ultimately, they’re subject to an obligation to act in the best interests of the corporation.” That means the role of in-house counsel is to ensure all players understand their rights and responsibilities. That can become difficult when the dynamics of the situation create hostility, Waitzer suggests, or when tightened time frames present themselves. “The legal issues become, as is often the case in corporate law, judgment calls,” he adds.
David Surat, counsel with Borden Ladner Gervais LLP’s securities and capital markets group, says in-house counsel should expect shareholders to take advantage of activist techniques with any significant transaction, such as a merger and acquisition. This became apparent in examples such as the bid in opposition to the merger of the Toronto Stock Exchange and London Stock Exchange, which was spearheaded by a group of major banks and pension funds. “If you are planning a significant transaction, the lesson is that you’ve got to try to anticipate the tactics someone might take if they come out of the woodwork, or someone you already know about,” says Surat.
At the same time, Surat does not believe shareholder activism in Canada will overnight become as prevalent as it is in the United States. “If you look back over the last couple of years, there’ve been a lot of people saying shareholder activism is coming, things are changing,” he says. “I think to a certain extent that’s true, but it may have been somewhat overstated. I don’t think there’s been a revolutionary change in the way things happen, but I do think the level of scrutiny that boards are being put under, and the amount of focus of shareholders on their ability to influence corporate decisions, has certainly risen. I think boards are much more focused on potential responses of shareholders to any action that’s taken.”
Nonetheless, there appears to be clear consensus from those in the corporate legal community that shareholder activism in Canada is no fad. That means it would be imprudent of in-house counsel to fail to do their homework on the trend. “I don’t think it’s a flash in the pan,” says Enbridge’s Love. “It is an increasingly important issue for companies, and lots of companies are putting the resources that are required into their communication with shareholders in this area.”
