Shareholder activism could rise as price volatility, ESG issues take centre stage: Blakes lawyer

With increased volatility in the markets, there will likely be challenges in pricing deals at attractive prices that shareholders will embrace, something that could lead to more shareholder activism, Blakes partner Alex Moore recently told attendees to a webinar looking at the upcoming “proxy season.”

 In terms of themes in activist campaigns, Moore said during the webinar held last week, M&A is a perennial issue, with disgruntled shareholders wanting announced deals scuttled or sweetened. However, in 2001 “we actually saw a jump in those kinds of M&A activist campaigns,” to over 53 per cent of the total from 39 per cent in 2020.

 “It’s likely that the disruption from the pandemic and wild gyrations in company stock prices in the markets have made valuing companies more challenging and therefore tougher for boards to evaluate what shareholders would consider fair consideration in an M&A transaction.”

 As well, environmental, social, and governance issues will increasingly be in the spotlight in activist behaviour, Moore said, as investors become more “focussed on allocating capital in a way that betters society.” There will be more scrutiny of the “E” and “S” in ESG, he says.

 “The social conscience of corporations is under scrutiny,” said Moore, whose practice focuses on mergers and acquisitions, capital market and corporate governance. “Shareholders are compelling corporations to examine what their purpose is beyond shareholder maximization or value maximization.” There is also a rise in ESG-related funds that are making themselves heard ahead of shareholder meetings.

 One measure of the growing role of ESG activism is the number of signatories to the United Nations Principles for Responsible Investing. “There’s been an accelerating upward trend of the number of signatories,” he said, with the number of assets under management that they represent around US$140 trillion. The Principles for Responsible Investing espouses embedding ESG principles into investment mandates of companies and played an essential role in pushing for net-zero initiatives at the recent COP 26 Climate Summit.

 Moore noted that Laurel Hill Advisory Group, North America’s only independent, cross-border proxy solicitation firm, recently produced a report saying that more than 60 per cent of all shareholder proposals it surveyed were related to ESG in 2021, up from 25 per cent in 2020. The likely trend is that asset managers will put forward a growing number of these ESG-related proposals rather than niche investors and special interest groups.

 “This is significant because according to [American proxy advisory services company] Glass Lewis, shareholder proposals that are submitted by asset managers overall garner on average 67 per cent shareholder support relative to a much lower approval or shareholder support for proposals that are put forward by other parties.”

One asset manager embracing ESG goals is Inclusive Capital Partners, which says it is “leveraging capitalism and governance in pursuit of a healthy planet and the health of its inhabitants.” It has assets under management of US$1.2 billion and is even represented on boards such as Anaergia Inc., a waste management company based in Burlington, Ontario, and listed on the TSX.

 Moore also pointed to the campaign of Engine No. 1 and its battle with Exxon as an example of ESG-related shareholder activism. Last May, it managed to appoint several directors on Exxon’s board of directors with the intent of forcing Exxon to tackle climate change in a more meaningful way.

 With less than US$40 million worth of common shares in Exxon (approximately 0.02 per cent of Exxon’s shares), Engine No. 1 executed a proxy fight that resulted in its winning seats on the board of Exxon for three out of its four nominations. It won the support of large institutional investors, including BlackRock, Vanguard and State Street, who all voted against Exxon’s leadership and favoured the activist group’s nominees.

 “These shareholders recognize the relationship between long-term shareholder value and the need to manage towards carbon neutrality, and managing climate risks,” he said. “And so, I think that’s the theme that we’re going to be seeing, going forward, is that shareholders have fully embraced the concept that being mindful of environmental issues is fundamentally related to value.”

 Looking at Canadian shareholder activism, Moore said that there has been a “slight decline” over the last few years in activist demands here. He added that it is interesting to note that this decline comes in a context where Canada has been recognized as having “one of the most activist friendly-legal regimes” globally.

 For example, a shareholder can requisition a shareholder meeting if it holds at least five per cent of a company’s stock, and rules allow shareholders to solicit votes without having to mail a proxy circular, making a campaign less expensive to run.

 There are many smaller companies in Canada, making it easier for an activist shareholder to build up a “critical mass” to launch a campaign. And there is the ability to submit nominations through the shareholder proposal process, “something shareholders in the U.S. have been lobbying for.”

 However, Moore said, “despite all of these structural advantages to shareholders in activism campaigns, we don’t see a disproportionate level of activism in Canada.”

One significant Canadian proxy battle that Moore says is on the horizon is TCI Fund Management’s attempt to have four of their nominees appointed to the board of Canadian National Railway Co. It has also suggested its own candidate for the CEO position, with the current one announcing his retirement in January 2022. The vote on this issue will take place in March.

 TCI, which owns five per cent of CN shares, started the proxy fight, arguing that CN’s failed attempt to buy Kansas City Southern for US$30 billion demonstrated “flawed decision making.”

Earlier this year, the US Surface Transportation Board rejected CN’s plan to use a voting trust to make the purchase, as Kansas City Southern had demanded to pay out shareholders immediately. Kansas Southern eventually accepted a bid from rival Canadian Pacific Railway Ltd, backing out of its merger agreement with CN, given it has a better chance of gaining regulators’ approval.

Read more: What are the consequences when backing out of an accepted offer in Canada?

 “The Board consistently misjudged the STB and displayed flawed decision making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset,” Chris Hohn, TCI’s founder and managing partner, said in a statement.