SECURITIES REGULATION & IR

Public issuers and investors are likely to forever debate the relative merits and drawbacks of shareholder activism. However, activism has become a mainstream feature of our capital markets. Faced with uncertain and challenging environmental, social, geopolitical and economic climates, being proficient at anticipating investor activism, in its myriad of forms, has never been more important, particularly as the key players and their toolkits continue to evolve. This article provides an overview of some recent trends and developments in shareholder activism, and offers practical guidance for investor relations professionals to more effectively navigate through the storm of complexity that activist situations present.

Recent Developments in Canada and the United States

Investor activism has continued to evolve over the past 15 years. One contributor to this sea change has been the rise of index funds. Whereas index funds had historically voted in lockstep with issuers’ management and Boards, today they increasingly display an independent streak when exercising their voting preferences. A similar trend is emerging among active asset managers, which are becoming less reliant on the voting recommendations of proxy advisory firms’ ISS and Glass Lewis, and are also transferring some of their voting power to their clients (e.g. the BlackRock Voting Choice program). Adding to this transformation has been the expanding array of would-be activists – no longer limited to traditional hedge funds, today’s engaged investors include investment funds, asset managers, pension funds, private equity firms, public interest and lobbying groups, investor coalitions, insiders and other one-time or occasional activists. On top of this, retail investors, regulators, and the media are increasingly influencing the outcome of campaigns, as well as the parties’ conduct.

In addition, the array of issues that give rise to (or are playing more central roles in) activist situations has expanded. While fundamental mismanagement and underperformance issues are still core to most activist campaigns, themes surrounding environmental matters (including climate change, the NetZero transition and climate-related disclosure), social issues (including diversity, equity and inclusion and human rights), stakeholder capitalism, corporate purpose and executive compensation frequently form part of the theses and the narrative.

Important securities regulatory changes have also added new wrinkles to the landscape. For example, this year, the U.S. Securities and Exchange Commission (SEC) introduced new ‘universal proxy’ rules, requiring issuers and dissidents to give shareholders the ability to pick and choose from a mixed slate of management and dissident nominees in any proxy campaign, except in limited circumstances. While these changes are unlikely, in our view, to result in a wholesale shift of power to activists as some have predicted, the rules are likely to result in more tactical uses of advance notice by-laws and may make it easier for dissidents to get at least one or two dissident nominees on their slates elected. The SEC has also proposed several significant changes to its 13D beneficial ownership reporting regime, including: reducing the time investors have to file a 13D from 10 days to five; shortening the time investors have to file Schedule 13D amendments to one business day; and proposing to redefine the definition of beneficial ownership to include certain derivatives, such as cash settled swaps. If implemented, these rule changes are likely to favour management by making it more difficult and costly for activists to quietly accumulate the stock positions needed to pursue proxy campaigns.

In Canada, we’ve also witnessed some legal developments relevant to the activism space, and signals that more changes may be coming. In addition to existing tools in the Canadian legal landscape that some suggest make Canada a more activist-friendly jurisdiction – such as the right of shareholders holding 5% or more of an issuer’s voting shares to requisition a meeting, the ‘oppression remedy’, and the ‘15-shareholder or less’ and ‘public broadcast’ proxy solicitation exemptions available only to dissidents – the recent advent of ‘true majority voting’ for all public companies incorporated under the Canada Business Corporations Act (CBCA) may now be leveraged to target and remove directors perceived as being ineffective stewards. Canadian securities regulators are also revisiting Canada’s ‘early warning reporting’ regime (similar to the U.S. 13D regime), raising questions of whether they intend to pursue initiatives similar to those proposed in the U.S., particularly relating to the treatment of derivatives.

Lastly, prominent wins for activists over the years have highlighted that no public issuer is immune from activism. Cases like the successful replacement of a majority of the Board at CP Rail by Pershing Square in 2012 and this year’s installment of three new directors to the Board of Suncor Energy by Elliott Investment Management serve as illustrative examples.

Today’s Activists are Sophisticated and Highly Prepared

In their pursuit of alpha, activists have proven to be sophisticated, innovative, well-researched, well-advised and highly prepared; they also tend to be nimbler than the issuers they target. As such, the best advice for IR teams is to be proactive, be prepared and, most importantly, be ready to listen and engage.

Be Proactive

Companies should never wait until an activist has emerged before preparing. While it is true that corporate leaders have businesses to run, this reality is not an excuse to put off proper evaluation and planning. The following three practical actions should be part of every IR team’s repertoire:

1. Regularly assess your organization’s vulnerabilities, both absolutely and relatively, applying an objective lens. How does the company fare from a governance perspective? How does its financial, stock price and operational performance stack up? Are there broader social, geopolitical, environmental, strategic or other issues where your organization lags, and are there potential solutions that aren’t being explored?
2. Know your investor base. It is critical that IR professionals maintain a stock watch program to track trading activity and investors’ regulatory filings, follow significant changes in stock ownership, surface unusual trading patterns and, in all cases, ensure significant changes or suspicious developments are escalated to the appropriate members of senior management and/or the Board of Directors.
3. Maintain meaningful, ongoing dialogue with your investors. An engagement plan should not be limited to once-a-year meetings. IR teams should maintain up-to-date profiles of the company’s key investors, and know the key portfolio and governance decision-makers, voting policies and views of the company and its Board, management, business, operations, performance and governance practices.

Remember, core to the success of any activist campaign is the activist’s ability to build broad-based support for its thesis from among the issuer’s major investors. Knowing your shareholders, and staying in regular touch with them, not only helps to detect that a problem may be on the horizon, but is also the best way to ensure that the organization has built the investor trust and support needed by management and the Board if an activist emerges.

Be Prepared

In addition to being proactive, IR teams should, in consultation with senior management and the Board, have an established game plan regarding when and how to respond, should an activist emerge. There is no ‘one-size-fits-all’ solution, so most plans will include alternatives and contingencies. Key steps that should be taken when a potential activist is on the horizon include:

• Diligence on the potential activist. What are its credentials and track record; who are the key decision-makers; what relationships might the activist have with other investors or market participants, including proxy advisors, analysts, asset managers and the media; and what is the activist’s likely thesis and its relative merits?
• Develop a potential response plan, based on the range of possible outcomes. For example, how might the issuer engage and/or respond, and through whom? Is it an opportune time to re-engage with other investors to solicit their feedback, or are there strategic or legal pitfalls to doing so? Are there instances of legal non-compliance by the activist that may warrant a formal response, including regulatory intervention?
• Establish a robust communications plan. IR teams are well-advised to have in place a developed, and vetted, communications strategy. Issuers should maintain a disciplined communication strategy – one that conveys credibility and consistent messaging across platforms and filings. One prong of that plan, which is often underutilized, is building a robust social media presence, particularly for issuers with many retail investors. A strong social media following cannot be created in short order – it must be built over time, so that it can be leveraged if and when needed.

Listen and Engage

One final piece of advice that is always given, but often disregarded, is ‘listen and engage’. Create the opportunity for your company’s investors to provide unvarnished feedback. For example, if you want to know your investors’ views of management, some engagement must be scheduled without management present. A key aspect of effective engagement is listening – what is being said, and what is not being said? With the growing focus on a wide range of ESG topics, stakeholder capitalism and corporate purpose, IR teams can help their organizations develop the proper processes, opportunities and scripts to facilitate engagement across these issues. It will be a rare circumstance when not engaging, or being dismissive of investor feedback, is the appropriate response.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Jennifer F. Longhurst (Partner) and Jonathan Leung (Associate) at McCarthy Tétrault LLP.