Guide to Shareholder Activism and Proxy Contests in Canada
This guide discusses the principal legal and practical issues faced by both activists and target companies, as well as notable recent development and key differences between Canadian and U.S. requirements. About This Guide
1 Guide to Shareholder Activism and Proxy Contests in Canada Contents 01. Applicable Rules 2 02. Right to Requisition a Shareholders’ Meeting 2 03. Stake-Building and Beneficial Ownership Reporting 6 04. Competition and Antitrust Legislation 8 05. Group Formation: Insider Trading and Joint Actor Characterization 9 06. Selective Disclosure 10 07. Poison Pills 12 08. Voting Shares Acquired After the Record Date 13 09. Advance Notice Bylaws 13 10. Universal Proxy Cards 15 11. Requests for Corporate Records 16 12. Canadian Resident Director Requirements 17 13. Shareholder Proposals 19 14. Compensation Arrangements for Director Nominees 21 15. Proxy Solicitation 22 16. Limited Private Proxy Solicitation 23 17. Solicitation by Public Broadcast 23 18. Soliciting Dealer Fees 24 19. Classified Boards 26 20. Majority Voting 26 21. Withhold Campaigns 27 22. Virtual Contested Meetings 28 23. Private Placements During Proxy Contests 30 24. Empty Voting 32 25. Mini-Tenders 33
2 Davies | dwpv.com 01. Applicable Rules In Canada, the rules governing shareholder activism are derived from four principal sources: the target’s corporate statute and constating documents, securities legislation, common law and stock exchange rules. The target may be federally or provincially incorporated or may be a creation of contract (for example, a trust governed by provincial law). Canada does not have a single federal securities regulator; rather, each province and territory has its own securities legislation and regulatory body. For purposes of this guide, our analysis is generally based on the Canada Business Corporations Act (CBCA), the most common incorporation statute among companies listed on the Toronto Stock Exchange (TSX); and the Securities Act (Ontario), the provincial securities statute that applies to all companies listed on the TSX. The corporate statutes and securities laws of the other major Canadian jurisdictions are substantially similar with respect to proxy solicitation and shareholder rights, with some exceptions. In addition to applicable legal requirements, shareholder activism is also governed by the rules of the TSX or the TSX Venture Exchange (TSXV) and informed by the guidance published by Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis). In Canada, ISS has published the leading source of guidance on proxy voting for companies listed on the TSX and TSXV. 02. Right to Requisition a Shareholders’ Meeting One of the most powerful rights that shareholders of Canadian corporations enjoy is the right of holders of not less than 5% of the issued voting shares to requisition the directors to call a shareholders’ meeting. On receiving a valid requisition proposing proper shareholder business—most commonly to remove and elect directors—the directors must, within 21 days, call a meeting of shareholders to transact the business stated in the requisition.1 CONTENT OF REQUISITION While significant, the requisition right is not quite as powerful as it may appear due to a series of judicial decisions that have added content and procedural requirements not found in the statute, making the practical use of the requisition right difficult. Canadian courts have held shareholders to a high standard of technical compliance in submitting requisitions and have demonstrated a propensity to invalidate requisitions on technical grounds. For example, in Wells v Bioniche Life Sciences Inc.2 (Bioniche), a 2013 decision of the Ontario Superior Court of Justice, the Court upheld a board’s decision to reject a requisition on the basis that it had not been signed by a registered holder of 5%, even though the shareholder who had submitted the request was known by the board to beneficially own a sufficient number of shares to requisition a meeting. 1 CBCA, s. 143. 2 2013 ONSC 4871.
3 Guide to Shareholder Activism and Proxy Contests in Canada In addition, in Bioniche, the Court found the shareholder’s requisition to be invalid because the dissident proposed the removal of the directors but did not provide any names or biographical information for new directors to be proposed by the dissident. The Court’s finding in Bioniche constituted a new court-imposed requirement since the corporate statute did not in fact contemplate that a shareholder requisitioning a meeting to remove directors will necessarily propose nominees to fill the vacancies created by the removals. Consequently, a requisitioning shareholder will typically have to recruit its nominees well in advance of the date by which notice would be required under the company’s advance notice bylaw (typically 30 days) prior to the meeting. TIMING OF MEETING Canadian courts have interpreted the directors’ statutory obligation to “call” a meeting within 21 days of the requisition as being satisfied simply by the announcement of a date for the meeting. The board need not actually hold the meeting or even mail a notice of meeting within the 21 days. Rather, the meeting must be held within a reasonable time determined in the good faith business judgment of the directors. What is regarded as a reasonable time will depend on the circumstances—for example, whether the requisitioned meeting pertains to a specific transaction or pending event and whether the requisitioning shareholder would be prejudiced by delay. Delays as long as four to seven months have been accepted by the courts. Often, boards responding to a requisition will schedule the requisitioned meeting to be held at the same time as the annual general meeting, even if the annual meeting is as much as six months away. This was the case in Marks v Intrinsyc Software International3 (Intrinsyc Software International), in which the board, citing the disruption and expense of holding a separate special meeting of shareholders, scheduled the requisitioned meeting for the same time as the annual general meeting, 155 days after the date of the requisition. In considering the dissident’s complaint over the delay, the Ontario Superior Court deferred to the business judgment of the board, accepting as reasonable the board’s scheduling of the requisitioned meeting to avoid unnecessary costs. More recently, however, in reviewing a board’s decision to hold a meeting five months after the date of the requisition, the Ontario Superior Court questioned the board’s business judgment in its exercise of discretion in calling a meeting of trustees. In Sandpiper Real Estate Fund 4 Limited Partnership v First Capital Real Estate Investment Trust4 (Sandpiper), two unitholders of a REIT requisitioned a meeting of unitholders with the goal of replacing four of nine of the issuer’s trustees to oversee the implementation of a capital allocation plan, which included the sale of certain assets by the issuer. The activists requisitioned the trustees to hold a unitholder meeting no later than March 1, 2023, but the board called a combined annual and special meeting of unitholders for May 16, 2023, five months after the requisition. 3 2013 ONSC 727. 4 2023 ONSC 794.
4 Davies | dwpv.com The Court noted that there is a “fundamental right” for unitholders to have the requisitioned meeting held expeditiously. While this does not imply a right to have the meeting held immediately, or even at the soonest available date, it does imply an obligation to hold the meeting “without unreasonable or unjustifiable delay.” In this, boards still generally enjoy deference under the business judgment rule in determining the appropriate timing for the meeting. The Court then considered whether the board was entitled to the protection of the business judgment rule. It first looked at the board’s process to examine whether the board applied an appropriate level of prudence and diligence in its decision-making. The Court took issue with the fact that the board had held only one twohour meeting at which the requisition of the activists was only one item on the agenda and that the trustees targeted by the activists participated in the deliberation. On the whole, the Court found that the process failed to demonstrate the required independence and objective process that would warrant deference, and the reasons cited by the board did not justify a five-month delay in holding the meeting. The Court also examined the reasons cited by the board for the delay. The board argued that (i) holding two separate meetings would be too expensive; (ii) the unitholders should be given greater time to consider the issues to be raised at the meeting; and (iii) the meeting should be delayed to allow for the issuer’s business plans to unfold. On the first argument, the Court in Sandpiper found that, given the large size of the issuer, a “cost saving” argument was not persuasive (in contrast to the small size of the issuer in Intrinsyc Software). On the second and third arguments, the Court found that allowing for additional time before holding the requisitioned meeting would have the potential to defeat the very purpose of the meeting and was therefore not an appropriate argument. The Sandpiper decision is a cautionary tale for boards seeking to delay the timing for a requisitioned meeting. A board’s decision-making in this context will be heavily scrutinized and will focus on the management of conflicts and adequacy of the board’s process. Boards should consider establishing a special committee, or meet in camera, without the presence of conflicted board members who are subject to the shareholder’s requisition. Boards should also be careful to tailor their response to the specific circumstances, and their reasons for delaying a meeting should make sense in the context of the issuer’s size and potential near-term material developments. MEETING CALLED BY SHAREHOLDERS If the directors do not call a meeting within 21 days of receiving the requisition, any shareholder who signed the requisition may call the meeting. The corporation is required to reimburse the shareholders for expenses they reasonably incurred in requisitioning, calling and holding the meeting unless shareholders resolve otherwise at the requisitioned meeting. However, what happens when the shareholder calls the meeting is not entirely clear: the statute provides little guidance, and there is scant precedent to look to because in virtually all cases the corporation calls the requisitioned meeting.
5 Guide to Shareholder Activism and Proxy Contests in Canada Although this statutory right is clearly enshrined, the Bioniche case casts some uncertainty over whether this right would be supported by the courts if challenged. Following their first failed attempt to requisition a meeting, the dissident shareholders of Bioniche Life Sciences Inc. (Bioniche) submitted a second, fully compliant requisition. Before the requisition was submitted, the Bioniche board of directors announced that it had set a date for the company’s annual shareholders’ meeting and established a record date for the meeting. The announcement was made six months prior to the meeting date, much earlier than the date the meeting would normally be announced. The board then relied on a provision in the corporate statute that relieves a board from having to call a shareholders’ meeting in response to a requisition if a record date for a meeting has already been set. Although the Court concluded that the right of a shareholder to call a meeting applies when a board declines to do so, even if a board has already fixed a record date, the Court added that “a court would be unlikely to uphold a meeting called by a shareholder” in circumstances in which one of the statutory exceptions applies to the board’s obligation to call a meeting. The Bioniche case is another example of the courts’ propensity to limit shareholders’ access to statutory rights. Bioniche also illustrates how Canadian courts have allowed boards to use technicalities to defeat requisition rights. The Court agreed with the dissident Bioniche shareholders that the board’s early announcement of the record date for the annual meeting was clearly calculated to allow the board to reject a valid requisition. However, the Court declined to find fault with the board’s actions, applying the deferential business judgment rule standard of review to the board’s actions and concluding that the effect of delaying the dissidents’ ability to challenge management by six months was reasonable in order to allow the board to pursue the business plan that it believed was in the company’s best interests. STANDARD OF REVIEW OF BOARD ACTION Bioniche is only one of many judicial decisions illustrating the propensity of Canadian courts to apply a deferential standard of review to board decisions in proxy contests. Although the business judgment rule has been imported by Canadian courts from the United States, Canadian courts have applied the rule more liberally and with less focus on the prerequisites for its application. Canadian law has not adopted anything akin to the standard developed by Delaware courts in Blasius Industries, Inc. v Atlas Corp.,5 which places the burden on the board to demonstrate a “compelling justification” for actions that have the primary purpose of impeding the exercise of shareholder voting power. However, it is possible that the recent Sandpiper decision may signal an emerging judicial willingness to apply the business judgment rule with more skepticism in the context of the exercise of shareholder rights. 5 564 A.2d 651 (Del. Ch. 1988).
6 Davies | dwpv.com 03. S take-Building and Beneficial Ownership Reporting Shareholders acquiring a significant position in a Canadian listed company are required to publicly disclose their ownership once they acquire beneficial ownership of 10% or more of any class of equity or voting securities of the company. Beneficial ownership includes shares that the filing shareholder has the right or obligation to acquire within 60 days, whether or not such right or obligation is conditional (for example, shares underlying options and other convertible securities or shares underlying physically settled derivatives). Equity derivatives may constitute beneficial ownership of the reference shares if the filer has the ability, formally or informally, to obtain the shares or to direct the voting of the shares held by the counterparty. Upon reaching 10%, the shareholder is required to promptly announce its acquisition by press release, file an early warning report within two trading days of the acquisition and stop acquiring any further securities of the relevant class for one full trading day after filing the early warning report.6 Thereafter, the shareholder must report increases and decreases in its holdings of 2% or more, as well as when shareholdings fall below the 10% ownership threshold. Similar to the requirements of Rule 13d under the U.S. Securities Exchange Act of 1934, the early warning reporting rules require disclosure of the purpose of the shareholder and its joint actors in acquiring or disposing of the issuer’s securities and any plans or future intentions the shareholder and its joint actors may have that relate to or would result in, among other things, a corporate transaction, changes to the issuer’s capitalization or dividend policy, board or management changes or proxy solicitations.7 Canadian early warning reporting requirements are regarded by some as being more lenient than those under Rule 13d because the Canadian requirement is triggered at 10%, whereas the U.S. requirement is triggered at 5%. However, the U.S. rules provide a considerably longer grace period for disclosing one’s position—the initial report must be filed within 10 calendar days (soon to be 5 business days8) in contrast to Canada’s requirement for an immediate press release—and the U.S. rules do not impose a trading moratorium. ALTERNATIVE MONTHLY REPORTING For institutional investors, such as investment funds eligible to use the Alternative Monthly Reporting System (AMRS),9 there is an exception from the trading moratorium and the obligation to issue an immediate press release and file an early warning report within two days. To rely on the AMRS, the shareholder must be an “eligible institutional investor.” This includes financial institutions, mutual funds and pension funds, and generally includes investment funds such as hedge funds that are managed by a registered investment adviser (including advisers registered by the U.S. Securities and Exchange Commission (SEC) under the 6 N ational Instrument 62-103, Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103), Part 3 and National Instrument 62-104, Take-Over Bids and Issuer Bids (NI 62-104), Part 5. 7 NI 62-103, Form 62-103F1, Item 5 and Form 62-103F2, Item 5. 8 See https://www.dwpv.com/en/Insights/Publications/2023/SEC-Amends-Beneficial-Ownership-Reporting-Rules. 9 NI 62-103, Part 4.
7 Guide to Shareholder Activism and Proxy Contests in Canada U.S. Investment Advisers Act of 1940). Under the AMRS, the shareholder must file a report within 10 days of the end of the month in which the 10% threshold is crossed and thereafter must file updated reports when its ownership increases or decreases above or below specified levels (i.e., 12.5%, 15%, 17.5%, etc.), when the filer’s ownership falls below 10% or there is a change in a material fact contained in the prior report. DISQUALIFICATION FROM AMRS A shareholder will be disqualified from AMRS eligibility if it intends to make a formal takeover bid for the company or to propose a transaction that would give the shareholder effective control over the company. A shareholder is also disqualified if it solicits proxies (including via private solicitation under an exemption) in support of dissident board nominees or in support of a merger not supported by the issuer’s management or in opposition to a merger proposed by the issuer’s management.10 Notably, merely having an intention to propose a dissident slate at a shareholders’ meeting or holding securities for the purpose of influencing the control or management of the company does not disqualify the shareholder from relying on the AMRS. This is in contrast to Rule 13d, which requires a shareholder to switch from a Schedule 13G filing to a Schedule 13D filing if its intention changes from being a passive investor to being active (for example, as a result of deciding to propose a nominee for the board or merely having the purpose or effect of influencing the control of the company). TREATMENT OF DERIVATIVES Cash-settled equity derivatives are not required to be included in determining whether an early warning report obligation is triggered. However, for a filer that is otherwise a 10% or greater holder, any equity derivatives it holds must be described in the early warning report, including a description of the material terms of the derivatives and their impact on the filer’s security holdings. To address concerns that derivatives could be used to “park” or hide ownership of shares, the Canadian Securities Administrators (CSA) has provided guidance regarding circumstances in which an investor will be deemed to beneficially own shares underlying an equity derivative. For example, an investor could be deemed to beneficially own shares underlying a derivative (whether or not cash-settled) when it has the ability, formally or informally, to obtain the securities or to direct the voting of securities held by a counterparty to the derivative. The CSA announced in 2022 that it was undertaking a review of the early warning reporting regime to consider the scope of disclosure requirements relating to equity derivatives. This was prompted, in part, by a 2021 decision of the Alberta Securities Commission (ASC) in Re Bison Acquisition Corp.11 (Re Bison), in which the ASC found the use and non-disclosure of cash-settled total return swaps by a hostile bidder in a competitive bid situation to be “contrary to the public interest” in the circumstances of that case. 10 NI 62-103, s. 4.2. 11 2021 ABASC 188.
8 Davies | dwpv.com 04. Competition and Antitrust Legislation Canada’s antitrust regime does not impose notification or government-clearance obligations at the early stake-building stage by an activist and does not, unlike the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) in the United States, distinguish between shareholders with passive intent and those with an intention to effect change in the policies of the target company. In Canada, notification under the Competition Act is not required until the acquirer acquires more than 20% of the target company’s voting shares, and notification under Canada’s Investment Canada Act (ICA) is not required for an acquisition of less than a one-third voting interest in a Canadian business. In contrast, in the United States, the HSR Act can work, in effect, as an early warning system requiring notification to the target and government clearance at the early stake-building stage and a lengthy moratorium on purchases after the filing with the regulatory authority—even where the target is a Canadian company. The notification regime under the HSR Act is largely based on (i) the value of voting securities of the target company to be held as a result of the transaction, (ii) the size of the parties and (iii) whether the target company is considered a foreign issuer or a U.S. issuer. A Canadian company may be considered either a foreign issuer or a U.S. issuer; it is a foreign issuer if it is not incorporated in the United States and does not have its principal offices there. The term “principal offices” is not defined, but longstanding guidance explains that the principal office should be “that single location which the person regards as the headquarters office of the ultimate parent entity. This location may or may not coincide with the location of its principal operations.” For 2023, notification may be required for an acquisition of voting securities of a U.S. issuer where (i) the acquirer will hold voting securities of the target company valued in excess of US$445.5 million or (ii) the acquirer will hold voting securities of the target company valued in excess of US$111.4 million and one party to the transaction has total assets or annual net sales in excess of US$222.7 million and the other party has total assets or annual net sales in excess of US$22.3 million. These thresholds are adjusted annually. An acquisition of voting securities of a foreign issuer is subject to the same thresholds. However, in addition, thresholds relating to the value of the target company’s U.S. assets or sales apply. For 2023, this threshold requires that the foreign issuer have U.S. assets or annual sales of at least US$111.4 million. Furthermore, if the purchaser is also a foreign person, no notification is required unless the transaction will confer control over the target foreign issuer. If the applicable thresholds are satisfied, the investor is required to make a filing with the U.S. antitrust agencies (the Federal Trade Commission and the Antitrust Division of the Department of Justice) and to not acquire control of the target company or voting securities of the target company in excess of the US$111.4 million threshold until the expiry of the applicable waiting period (generally 30 days after the notice has been filed).
9 Guide to Shareholder Activism and Proxy Contests in Canada There is an exemption to the requirement to file an HSR Act notice if the investor acquires less than 10% of the voting securities of the company and has a passive intent. In addition, some investors use cash-settled equitybased derivatives in order to obtain an economic exposure to companies subject to the HSR Act because such instruments do not count toward the applicable thresholds for the purposes of HSR Act notification. 05. Group Formation: Insider Trading and Joint Actor Characterization One of the challenges faced by activists in Canada is gauging and organizing support from major Canadian institutional investors. Canadian institutions are wary about aligning themselves publicly with a dissident shareholder, at least at the beginning of a contest, primarily out of concern to preserve their freedom to trade in the securities of the target issuer. Their concern stems from two considerations: insider trading and joint actor characterization. INSIDER TRADING Under Canadian insider trading rules, a person in a special relationship with a public company (which includes, in addition to Canadian public companies, any issuer, wherever situated, whose securities are publicly traded) is prohibited from trading with knowledge of material non-public information (MNPI). This prohibition extends to anyone who learns of MNPI from a special relationship person. The Canadian rules are statutory and do not turn on notions of “duty” and “misappropriation.” The category of “special relationship” persons is large and includes tippees and a person that beneficially owns more than 10% of the voting securities of the target company. Thus, an activist holding more than 10% of a company’s shares is a person in a special relationship with the company. Information that the activist may learn in discussions with the target company about, for example, the target’s business plans or the target’s response to the activist’s proposals may amount to MNPI that, if communicated by the activist to an institutional shareholder, will restrict that shareholder’s ability to trade. It is even possible in these circumstances that information about the activist’s own plans vis-à-vis the target company could amount to MPNI that, if disclosed to an institutional shareholder, would similarly restrict that shareholder’s ability to trade. Even if the activist is not a special relationship person, securities regulators may nonetheless take the view that the disclosure unfairly advantaged the recipient of the information in a manner that was “contrary to the public interest,” as securities regulators have done in Canada in other contexts. JOINT ACTORS The second concern relates to the issue of “joint actor” characterization, which under Canadian securities law is relevant both for purposes of the early warning disclosure requirements and for compliance with Canada’s takeover bid regime.
10 Davies | dwpv.com Under Canadian securities legislation, if an activist has an agreement, commitment or understanding with another shareholder that they intend to exercise voting rights in concert, they will be presumed to be joint actors. If the agreement, commitment or understanding is with respect to the acquisition of shares of the target company, they will be deemed to be joint actors. As a consequence, their holdings will be aggregated for purposes of determining whether the 10% early warning disclosure obligation has been triggered, and the joint actor will have to be named in the activist shareholder’s early warning report. The mere formation of a group holding more than 10% will not trigger a filing obligation unless it is a change in a material fact stated in a previously filed report. Perhaps more significantly, their holdings will also be aggregated for purposes of determining whether the mandatory takeover bid rules have been triggered. Canadian securities legislation requires that the acquisition of more than 20% of the outstanding voting or equity securities of an issuer be made through a formal takeover bid to all shareholders, subject to limited exceptions. The mere formation of a group holding more than 20% will not trigger the rule, but the first purchase of even a single share by a member of the group will require compliance with the bid regime unless the purchase can be made under one of the limited statutory exemptions. Accordingly, the activist and the institutional shareholder will need to ensure that their purchases and sales are coordinated in a manner to ensure compliance with the takeover bid rules and with Canada’s early warning disclosure rules. As a result, the activist and the shareholder will be unable to trade without each other’s knowledge and, presumably, agreement. Canadian case law confirms that the issue is not merely a theoretical one. In the August 2013 Alberta Queen’s Bench decision in Genesis Land Development Corp. v Smoothwater Capital Corporation,12 the Court found that the activist shareholder, Smoothwater Capital Corporation, was acting jointly and in concert with other shareholders of the targeted company from the date on which the parties participated in a conference call together with a proxy solicitation firm, reasoning that it could be inferred from such conduct that the parties had reached an understanding that they would support the proposed new slate of directors by voting in favour of the slate. 06. Selective Disclosure In Canada, the extent to which an activist can communicate information to other shareholders is not entirely resolved and therefore requires caution. Disclosure of material non-public information (MNPI) by a special relationship person (for example, a 10%-plus shareholder or a tippee who receives MNPI from the company) to another person constitutes “tipping” under Canadian securities law. Moreover, unlike in the United States, tipping is prohibited regardless of how the recipient acquired the MNPI and regardless of whether the recipient enters into an agreement to maintain the confidentiality of the MNPI. 12 2013 ABQB 509.
11 Guide to Shareholder Activism and Proxy Contests in Canada There is a specific carve-out for a person considering, evaluating or proposing a takeover bid, business combination or substantial asset acquisition that allows the person to disclose MNPI in the necessary course of the discloser’s business to effect such a transaction. However, no similar statutory exception exists for disclosures made by a person proposing a board change or proxy contest. For the activist shareholder holding more than 10% of a company’s shares or is otherwise a special relationship person, the question is whether the activist’s disclosure to others of its intention to pursue a board change or proxy contest constitutes prohibited tipping. If the activist’s plans amount to a “material fact”—that is, a fact “that would reasonably be expected to have a significant effect on the market price or value of the securities”—the only basis upon which disclosure of those plans to another person would not constitute tipping would be if the disclosure were made in the necessary course of business. There is very little guidance on the meaning of “necessary course of business” and, until October 2023, we had no substantive decision relating to the interpretation of the exception. The October 2023 decision of the Ontario Capital Markets Tribunal (Tribunal) in Kraft (Re)13 (Kraft) dealt with disclosure by a board chair of a public company to a long-time friend of near-final draft documentation relating to a transaction material to the issuer. The chair sent the materials for the purpose of seeking his friend’s input on the transaction and was found to have breached the tipping prohibition. The decision establishes four rules of interpretation: the tipper bears the onus of proving that the disclosure was made in the necessary course of business; the applicable standard is an objective one—the tipper’s subjective belief regarding whether the disclosure was necessary is not sufficient; the exception should be interpreted narrowly in light of the rationale for the tipping prohibition— namely, to ensure that everyone in the market has equal opportunity to receive and act on material information; and necessary course of business does not mean in the “ordinary course of business” and does not connote a mere business purpose, but rather imports a level of importance, including something that is “essential,” “indispensable” or “requisite” to the business. Helpfully, although the Tribunal held that, on the specific facts in Kraft, the necessity exception was to be understood with reference to the “issuer’s” business, it noted that it was not concluding that “in all factual situations the…exception is limited to a consideration of what may be in the necessary course of the issuer’s business.” In other words, the Tribunal left the door open to a finding that selective disclosure may be defensible where made in the necessary course of the tipper’s business. Nonetheless, given the lack of guidance on the application of the necessity exception to disclosures made by activists in the course of a campaign, activists in a special relationship with the company must exercise caution and may be practically constrained from communicating information to other shareholders whose support they are seeking. Caution is also dictated by the fact that Canadian securities regulators have demonstrated a willingness to use their “public interest” jurisdiction to sanction conduct that does not technically offend the statute, but that results in some unfair advantage to the trader or the tippee.14 13 2023 ONCMT 36. 14 Cormark Securities Inc. (Re) (2023), ONCMT 23; Finkelstein v. Ontario Securities Commission (2018), ONCA 61; Re Suman (2012), 38 OSCB 2809; Re Paul Donald (2012), 35 OSCB 7383; and Re Hariharan (2015), 38 OSCB 3356, 3373.
12 Davies | dwpv.com 07. Poison Pills Many Canadian and U.S. public companies have adopted poison pills (also known as shareholder rights plans), which provide that if an “acquiring person” exceeds a specified level of ownership (typically 20%), all shareholders other than the acquiring person can purchase stock at a substantial discount to the market price of the shares, resulting in significant dilution to the acquiring person. Canadian poison pills, like their U.S. counterparts, treat an acquiring person as the beneficial owner of shares owned by it and its joint actors. However, Canadian pills have evolved differently from U.S. pills, given the TSX requirement that pills be approved by a shareholder vote. This requirement has given shareholders, and ultimately ISS, considerable influence over the terms of poison pills. One way in which Canadian pills differ from U.S. pills is that typically the definition of “joint actor” will not include persons with whom the acquiring person has an agreement to jointly vote shares, but rather only persons with whom the acquiring person has an agreement with respect to the acquisition of shares. Attempts to include provisions, sometimes seen in U.S. pills, that expand definitions of “beneficial ownership” or “acting jointly or in concert” to capture agreements among investors to vote together or campaign to change or influence the control of an issuer have not gained ground in Canada. Commentary by Canadian securities regulators that echoes the voting guidelines of proxy advisory firms in Canada has made clear that rights plans should be effective only against takeover bids and should not apply to transactions or circumstances involving a shareholder vote such as contested director elections. Securities commissions in Canada are divided on the question of whether poison pills can impose on shareholders restrictions more onerous than those under the statutory takeover bid rules. In Aurora Cannabis Inc.,15 the Ontario Securities Commission (OSC) sent a clear message to the market that it will not tolerate poison pills with unusual terms that interfere with the established features of the takeover bid rules. In ruling that the rights plan at issue should be cease-traded for public interest reasons, the OSC stated that poison pills that vary the requirements of the takeover bid regime would confuse the market and serve “no useful purpose.” In the ASC's 2021 decision in Re Bison, the ASC implicitly rejected this principle. The ASC supported the target company’s amendment to its poison pill in the face of competing bids to include a shareholder’s economic exposure under cash-settled swaps in determining the shareholder’s “beneficial ownership” under the pill. The ASC concluded that the pill amendments preserved “shareholder choice” in the context of competing bids by preventing one bidder from acquiring “negative control” by increasing its ownership position, and thereby facilitated an open and even-handed auction for the target. The ASC’s determination seemed to be driven by an assumption that the bidder would have the ability to acquire, or influence the voting of, the shares underlying the cash-settled swaps and a concern that, whether or not the underlying shares were voted against an alternative transaction or not voted at all, the swaps had the potential to unfairly distort the outcome of the auction. 15 2018 ONSEC 10.
13 Guide to Shareholder Activism and Proxy Contests in Canada This decision has left the law unsettled on the use of cash-settled derivatives in the M&A context. It remains undetermined how the law in this area might be applied to proxy contests, but as the Re Bison decision concerned the voting, rather than the tendering, of shares, it is not difficult to anticipate the arguments that would be made in extending the application of the decision to proxy contests. In the meantime, other issuers (such as Elemental Royalties in response to a hostile bid by Gold Royalty) have already followed suit by including in their poison pills an extended definition of beneficial ownership that includes economic interests under cash-settled derivatives and other provisions that do not align with the Canadian takeover bid rules. 08. Voting Shares Acquired After the Record Date The question of who is entitled to vote at a shareholders’ meeting is determined by the particular corporate statute under which a company is incorporated. The CBCA stipulates that only a shareholder whose name appears on the shareholders list on the stated record date for the meeting is entitled to vote at the meeting. However, corporate legislation in several provinces and territories of Canada allows a purchaser of shares after the record date to vote at the meeting so long as the purchaser produces properly endorsed share certificates or otherwise establishes the purchaser’s ownership of the shares and asks the corporation (typically no later than 10 days before the meeting) to have his or her name included in the list of shareholders entitled to vote. 09. Advance Notice Bylaws Advance notice bylaws (or policies) set out requirements for shareholders to provide advance notice to a corporation of their proposal to nominate directors for election to the board at a shareholders’ meeting. Failure to comply with an advance notice bylaw can result in the shareholder being denied the right to nominate a director. Although the United States has a long history of adopting advance notice bylaws, Canadian advance notice bylaws were extremely rare prior to 2012. In 2012, Canadian courts condoned the use of these bylaws on the basis that they foster an orderly nomination process and informed decision-making by providing shareholders with reasonable notice of, and information concerning, a contested election of directors. As a result of the courts’ support, a majority of Canadian issuers have since adopted advance notice bylaws. Although bylaws and bylaw amendments can become effective immediately upon the board’s approval, they must be approved by the shareholders at the next meeting of shareholders following their passage to remain in place. The requirement for a shareholder vote has given ISS and Glass Lewis significant influence over the provisions of advance notice bylaws in Canada. In late 2014/early 2015, ISS and Glass Lewis reformulated
14 Davies | dwpv.com their policies for evaluating advance notice bylaws in Canada. This was largely in response to the Ontario Superior Court’s 2014 decision in Orange Capital, LLC v Partners Real Estate Investment Trust,16 in which the Court found that advance notice requirements are to be used only as a “shield” to protect shareholders and management from ambush and not as a “sword” to exclude nominations given by shareholders on ample notice or to buy time for management to develop a strategy for defeating an activist. In 2017, the TSX also weighed in on advance notice bylaws and provided guidance on which features of advance notice bylaws will and will not be viewed as acceptable for its listed issuers.17 Key elements of the guidance provided by ISS, Glass Lewis and the TSX include the following: – The notice period should not be less than 30 days before the shareholders’ meeting (if notice of the meeting is given 50 or more days prior to the meeting date), or 10 days following notice of the meeting if notice is given less than 50 days prior to the meeting date. – The notice period should not be subject to any maximum notice period. – If a shareholders’ meeting is adjourned or postponed, the bylaw should not restrict the notice period to that established for the originally scheduled meeting. – The bylaw should not require disclosure that exceeds what is required in a dissident proxy circular or goes beyond what is required under law or regulation. – The nominees identified in the notice should not be required to agree, in advance, to comply with the director policies and guidelines of the corporation. – The nominating shareholder should not be required to be present at the shareholders’ meeting, either in person or by proxy. – The board should have the ability to waive all sections of the advance notice bylaw in its sole discretion. Given the level and type of guidance provided in Canada, a typical Canadian advance notice bylaw will differ significantly from its U.S. counterpart. In particular, in Canada, advance notice bylaws rarely impose a requirement that a director nominee complete a questionnaire. Moreover, the company’s board typically has limited discretion to reject a director nomination. This contrast between Canadian-style and U.S.-style advance notice bylaws places Canadian companies that qualify as “U.S. domestic issuers” under SEC rules in a unique and largely uncharted position, which was highlighted in the 2023 Legion Partners’ proxy contest for Primo Water. Primo Water, a Canadian corporation cross-listed on the TSX and New York Stock Exchange qualified as a “U.S. domestic issuer.” Following initial engagement with activist Legion Partners, the company adopted a new advance notice bylaw that introduced the requirement that a director nominee complete a lengthy questionnaire and that gave broad discretion to the company to request additional information from 16 2014 ONSC 3793. 17 TSX Staff Notice 2017-0001 (March 9, 2017).
15 Guide to Shareholder Activism and Proxy Contests in Canada director nominees following the submission of their nomination. Although these features are fairly common in U.S.-style advance notice bylaws, they are virtually unseen in the Canadian context. Primo Water used its new U.S.-style advance notice bylaw as a tool to reject all the director nominations submitted by Legion Partners. It was this set of facts which led Legion Partners to launch an oppression application in the Ontario Superior Court of Justice seeking, among other things, a declaration that its director nominations were valid and an order to invalidate or amend the controversial provisions in the company’s U.S.-style advance notice bylaw. In its application, Legion Partners cited Canadian guidance and the established legal principle that, in Canada, advance notice bylaws be used as a shield to protect shareholders and not as a sword to exclude nominations given on ample notice. Similar complaints were made by the activist to the OSC and the TSX. Primo Water ultimately acceded to all of Legion’s demands in the litigation in a settlement agreement accepting all of Legion Partners’ director nominations and including such nominees on its universal proxy card. Shortly prior to the meeting of shareholders in which the contested election would take place, the parties settled the proxy contest on terms that required Primo Water to put two of Legion Partners’ nominees on the board and to adopt certain governance enhancements, including revisions to the advance notice bylaw to bring it in line with Canadian standards. 10. Universal Proxy Cards Canadian proxy rules have always permitted an issuer or a shareholder to use a “universal” proxy card. A universal proxy card lists the names of all of the duly nominated director nominees for election at an upcoming shareholders’ meeting, regardless of whether the nominees were nominated by management or shareholders. Universal proxy cards allow shareholders to vote for a combination of director nominees from competing slates, as they could if they voted in person at the shareholders’ meeting. When one party deploys a universal proxy card, that card becomes the more attractive option because shareholders can tailor their votes by voting for their preferred mix of management and dissident nominees. For example, if a shareholder supports a dissident who uses a universal proxy, but believes that the dissident slate put forward is too large, a universal proxy card would allow the shareholder to vote for a subset of the dissident nominees and also vote for one or more management nominees. In addition, the use of a universal proxy can provide an important informational advantage since, in the absence of agreement between a dissident and the issuer, typically neither side will have advance access to proxies submitted on the other side’s card. By using a universal proxy and persuading shareholders to use that proxy to cast their votes, a party may be able to secure a clearer picture of their prospects for success in advance of the meeting.
16 Davies | dwpv.com In Canada, a universal proxy was first used successfully in Pershing Square’s 2012 proxy contest for Canadian Pacific Railway.18 In that contest, both sides ended up using universal proxy cards—management doing so preemptively, presumably so that its card would not be viewed as less flexible than Pershing Square’s. Similarly, in JANA Partners’ battle with Agrium in 2013, JANA used a quasi-universal proxy, in which it offered shareholders the choice of voting among seven incumbents that JANA would accept, plus five of JANA’s nominees on its proxy card. This contrasted with Agrium, which listed only the 12 management incumbents on its card. In the years since those contests, universal proxy cards have been used with some frequency in contests involving larger cap companies, including the 2014 proxy contest for Americas Gold and Silver Corporation, the 2017 proxy contest for Granite Real Estate Investment Trust, the 2018 proxy contest for DavidsTea Inc. and the 2019 proxy contests for Methanex Corporation and Knight Therapeutics Inc., to name a few. In contrast, amendments to the U.S. proxy rules, which came into effect on August 31, 2022, now require the use of universal proxy cards by both management and dissident shareholders for all shareholder meetings involving contested director elections. In addition, the U.S. proxy rules provide for certain advance notice requirements, dissident proxy statement filing deadlines and mandatory solicitation requirements. Although most cross-listed Canadian companies are not subject to the new U.S. proxy rules because they qualify as “foreign private issuers” under SEC rules, Canadian companies that qualify as “U.S. domestic issuers” under SEC rules are required to comply. For companies and shareholders operating in this scenario, we would observe that typical Canadian advance notice bylaws do not mesh well with the new U.S. proxy rules. For example, a nominating shareholder that submits its notice of nomination within the 30-day minimum notice period prescribed by the bylaws may nevertheless be in breach of the U.S. proxy rules, which require the notice of nomination to be submitted no later than 60 days prior to the anniversary date of the company’s previous year’s annual meeting. 11. Requests for Corporate Records The ability of a shareholder to inspect a corporation’s corporate records is limited in Canada in comparison to the right of shareholders of U.S. corporations. Accordingly, U.S.-style “books and records requests” are not a useful tool for activists in Canada. In Canada, the right of a shareholder to inspect a corporation’s corporate records is governed by the corporation’s governing statute (for example, the CBCA in the case of a federally incorporated corporation). Anyone may request copies of the articles and bylaws of a public company incorporated under the CBCA and may examine the minutes of shareholder meetings and notices of change of directors, during the usual business hours of the corporation. Although shareholders are generally not entitled to request board meeting minutes, under the CBCA, they are entitled to examine the portions of any minutes of meetings of directors 18 T he dissidents in Biovail Corporation’s 2008 proxy contest also used a form of universal proxy, but were unsuccessful in that campaign.
17 Guide to Shareholder Activism and Proxy Contests in Canada or of committees of directors that contain disclosure of conflicts of interest by directors or officers of the corporation, during the usual business hours of the corporation. Additionally, anyone can request a copy of the shareholder list of such corporation upon payment of a reasonable fee and submission of a prescribed affidavit, which the corporation is required to provide within 10 days of such request. Under the CBCA and Canadian securities laws, the person requesting a shareholder list must refrain from using the shareholder list except in connection with (i) an effort to influence the voting of shareholders of the corporation, (ii) an offer to acquire securities of the corporation or (iii) any other matter relating to the affairs of the corporation. Under the CBCA, the corporation is required to provide a copy of its registered holder list as well as any holder of an option or right to acquire shares of the corporation. Under Canadian securities laws, the corporation is also required to provide a copy of the most recently prepared non-objecting beneficial owner list. These rights are considerably narrower than the right of a shareholder to inspect a corporation’s corporate records under Delaware General Corporation Law. Under that law, shareholders have the right to inspect the corporation’s books and records for a “proper purpose,” unless the shareholder is only seeking a shareholder list, in which case the burden is on the corporation to prove that a proper purpose does not exist. A proper purpose is one reasonably related to the shareholder’s interest as a shareholder. Although the scope of accessible documents might vary from state to state, it is considerably broader than the scope of documents available in Canada and generally includes the corporation’s governing documents, minutes from board meetings, minutes of shareholder meetings and records of other shareholder actions, shareholder lists and the corporation’s financial and accounting records. 12. Canadian Resident Director Requirements The CBCA, unlike most provincial statutes, prescribes Canadian residency requirements for the board of directors of a corporation. In contrast, Canadian stock exchanges like the TSX and the TSXV do not impose any such restrictions. Under the CBCA, a minimum of 25% of a CBCA corporation’s directors must be resident Canadians. Higher percentages are prescribed in certain cases. For instance, if a CBCA corporation operates in certain prescribed industry sectors—such as uranium mining, book publishing or sales, or film or video distribution—the majority of its directors must be resident Canadians. This higher threshold also applies to CBCA corporations that are subject to an act of Parliament mandating specific levels of Canadian ownership or control, or restricting the number of voting shares any single shareholder may hold. The CBCA defines a “resident Canadian” as (i) a Canadian citizen ordinarily resident in Canada, (ii) a Canadian citizen not ordinarily resident in Canada who is a member of prescribed class of persons, or (iii) a permanent resident ordinarily resident in Canada—excluding those who have resided in Canada for more than one year after becoming eligible for Canadian citizenship.
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