Explore how activist approaches are changing in the modern investment environment.
Canadian shareholder activism increases in scope, says Laurel Hill
Activism incidents down on last year but activists more successful with campaigns Shareholder activism in Canada is evolving and becoming more sophisticated. While down in terms of volume, it has ‘grown in prominence, scale and momentum,’ according to Laurel Hill’s fifth annual Trends in Corporate Governance report.
So far in 2019, 44 companies have been subject to activist demands in Canada, compared with 69 in all of last year.
‘When people think of activism, they generally think of board battles,’ says David Salmon, president at Laurel Hill. ‘[Board battles] are decreasing because of things like reputational damage, cost and evolving governance standards. But by no means is activism dead – it’s taking on other types of considerations.’
These considerations include mini-tender offers, in which shareholders attempt to block deals; public broadcasting exemptions (PBEs), where shareholders can issue press releases outlining their opposition to board members and their intentions to publicly campaign against their election; and circulars issued in opposition to deals.
Salmon says the PBE is one of the more powerful and cost-effective tools activists can use in order to get their views in front of boards. ‘A PBE allows investors to issue a press release outlining that they will solicit against a certain issuer,’ he explains. ‘In terms of a majority voting concept, a shareholder can put out that it opposes you as a board member and actively solicit against your election. It is cheap – all you have to do is issue a press release. You can then contact Reuters or Bloomberg to express why you oppose that board member. A board member has to resign from a board if he or she doesn’t get that 50 percent plus one vote. That can give you a lot of sway in how the board is going to be constructed.’
Dissident shareholders have been winning their battles with increasing frequency. This hit a high point in 2017, when 73 percent of dissidents won board fights, up from 25 percent in 2016. It dipped to 50 percent last year and has increased to 63 percent year to date.
This has coincided with an uptick in dissident support from proxy advisory firms. According to the report, ISS and Glass Lewis supported dissident board nominees nearly 50 percent of the time year to date. That’s up from about one third last year and around 10 percent in 2017.
Salmon says proxy advisers have been more supportive of dissidents because activist investors are better prepared than in the past. ‘Many activists have impressive nominees to support their rationale for change. Consequently, the proxy advisers recognize that a diverse board will lead to better results,’ he says.
Shareholder proposals have nearly doubled, from 27 last year to 53 year to date. Salmon says issues like ESG, executive compensation and board accountability are driving this year’s proposals and are likely to continue to drive proposals in the future. ESG, in particular, will be challenging for Canadian companies to address. ‘We’re in the early stages of fully understanding what ESG is,’ Salmon says. ‘There is a disconnect between what is being disclosed and what shareholders are looking for. Until we get more consistent types of disclosure, we are going to see this as a big issue.’
Another big issue boards and shareholders are going to have to grapple with is diversity. Newly passed guidelines for companies under the Canadian Business Corporations Act require Canadian companies to consider four factors when it comes to ensuring diversity in their business: gender, disability, whether a person is a member of an indigenous people and whether a person is a visible member of a minority group.
‘It’s become more than a gender issue,’ Salmon says. ‘Boards have to make sure they have diverse people with diverse thoughts.’
‘Anyone can be an activist now,’ warn Canadian governance advisers
Activism and threat of short-sellers dominate conversations at first Corporate Secretary Think Tank in Canada earlier this month
Shareholder activism hit record highs in Canada during 2018 and, while the activity has trailed off somewhat this year, speakers at the inaugural Corporate Secretary Think Tank – Canada cautioned that there is an increase in first-time activists.
In 2018 there were 78 activist campaigns in Canada, 57 of which had taken place by July, according to data from Activist Insight. In 2019, 28 companies had been targeted by July – marking a 40 percent year-on-year decrease in activity.
Some of the most defining contested scenarios of last year – such as the proxy fights at Detour Gold, Hudbay Minerals and Crescent Point Energy – were either led or defined by investors that wouldn’t have traditionally been considered as activists.
‘Anyone can be an activist. It’s important that you know who is voting your shares and that you understand the nature of activists in the US, domestically and overseas.’
Walied Soliman, global chair of Norton Rose Fulbright, agreed, encouraging the audience to take shareholder letters seriously. ‘What you do with inbound shareholder letters determines whether or not [the writers] become activists,’ he said.
Soliman and Freedman agreed that it’s essential for issuers to have a robust shareholder engagement strategy to mitigate the risks of activism.
During 2018 there was also a record number of proxy contests concerning board seats, with 18 contests going all the way to a proxy meeting, according to Activist Insight. This was a marked increase from the 10 proxy contests in 2017, the eight in 2016 and the single contest in 2015. By July 2019 there had been five contests.
The picture for settlements around board seats is more static, with 32 settlements in 2017, 34 in 2018 and 16 between January and July 2019.
But with the specter of shareholders acting as first-time activists, or traditional shareholders siding with activists, it’s less predictable whether a campaign will run all the way to the annual meeting, Soliman noted.
Freedman said it was the responsibility of governance professionals to ensure their board is aware of any potential governance vulnerabilities that could make it an attractive target for activists. ‘Be a conduit to the board,’ she said.
Soliman agreed, saying that corporate secretaries and governance professionals can play a crucial role in a contested situation. ‘Every campaign has two components,’ he said. ‘There’s always a substantive reason for a campaign. But every fight also has a moral narrative – it needs to be about CEO pay or governance in some capacity. In this room, you are the gatekeepers of the moral narrative.’
Freedman further stressed the need to take activist campaigns seriously, even if the activist isn’t ultimately successful. When it comes to a vote, she said, ‘51 percent is a not a win’.
Soliman also warned that Canada is attractive to short-sellers, describing it as an ‘alarming trend’. He suggested that the Canadian Securities Administrators, Canada’s financial regulators, need to intervene to prevent the release of short reports that often contain lies.
Too often, Soliman noted, the advice to issuers after being targeted with a short report is to sue the firm that initiated the attack. ‘That’s exactly what it wants – a long, protracted, high-profile legal process where it can say whatever it wants,’ he said.
One attendee who had held in-house positions at two large Canadian issuers outlined the nature of information that can be contained in short reports. In one instance, the short-seller highlighted that a company’s CEO had spent several years working for McKinsey and that Enron’s CEO had also worked for McKinsey. The intent was to tarnish the reputation of the under-fire CEO by likening him to one rogue former McKinsey employee. ‘How do you even begin to contest that?’ the attendee asked.
While there was no clear solution about how to handle a short report in the moment, several attendees came back to the maxim that a robust shareholder engagement plan will help mitigate some of the impact.
According to Activist Insight, 22 Canadian companies were targeted by short-sellers in 2018, while activity has been significantly less in 2019.
Canadian activism seen as ongoing despite slowdown
A record 75 Canada-based companies faced public activist campaigns last year Industry advisers say activist investing in Canada is very much still on the agenda despite a drop-off from last year’s mini boom, a new report finds.
A record 75 Canada-based companies faced public activist campaigns in 2018, according to Activist Insight Online research. That number is up sharply from the 56 subjected to public demands the year before though up more modestly from the total of 70 and 66 in 2015 and 2016, respectively. Similarly, there were a record 22 activist short attacks at Canada-headquartered companies last year, with healthcare having been the most commonly targeted sector since 2013.
However, just 28 Canadian companies had faced activists’ public demands this year as of the end of April 2019. That figure is down sharply from the 47 companies targeted by the same point last year and is below the average of 30 for the same year-to-date periods in 2015-2017. Activism in the basic materials industry fell by 59 percent in the same period this year.
But these headline figures may obscure a greater range of activity taking place, in part behind the scenes, experts quoted in the report suggest.
Activist Insight’s editor-in-chief Josh Black states. ‘While the level of activist interest in the resources sector has been volatile, the first few attacks on cannabis companies and high valuations in the US has made for an unpredictable start to 2019. As such, campaigns can come seemingly out of nowhere.’
Wes Hall, executive chair and founder of Kingsdale Advisors, says in the report: ‘While we don’t expect to reach a new peak this year, we have experienced a sustained high level of proxy contest activity since 2015, thanks to increased activism in M&A, favorable credit markets, a record number of investors engaging in public activism for the first time, and repeat activists going after the same target company again.’ The slowdown in activism in Canada this year is in line with global trends. Worldwide, there has been a 15 percent drop in the number of companies publicly subjected to activist demands so far this year, according to Activist Insight data on campaigns to the end of May.
Despite that, more than 500 companies globally have been publicly subjected to activist demands so far in 2019, although that is down from 619 in 2018’s record-breaking start to the year, Activist Insight notes in a separate report.
In Canada meanwhile, the report notes that other trends include M&A activism focusing more on opposing deals than in the US, with public demands to break up companies relatively infrequent. In Canada, 39 percent of all public M&A- and breakup-related activist demands since 2013 have been in opposition to M&A deals, compared to 21 percent in the US.
Nine percent of demands in Canada over that period were for break ups, compared to 16 percent in the US. Just of half (52 percent) of demands in Canada were for M&A deals, while almost two thirds (63 percent) of demands in the US pushed for deals.
The report also notes that another recent trend has been an increase in contested board seat campaigns. Fourteen such campaigns went to a vote in 2018, resulting in activists gaining 18 board seats. That was an increase from eight votes in 2017 that yielded 10 seats. But the number of settlements and related number of seats gained by activists has remained broadly similar since 2015, with 21 settlements and 34 seats last year.
‘That trend may be correlated to the relatively modest number of campaigns run by experienced activists, with newcomers prone to making less realistic demands,’ the report states.
Publishing, media and telecoms companies at highest risk from activists, notes research
FTI Consulting launches new ranking to track most vulnerable industries
Publishing, media and telecommunications are the sectors most vulnerable to activist investors, according to new research.
The three industries score highest in a new ranking that assesses companies according to their susceptibility to activist campaigns.
Developed by FTI Consulting, the scoring system considers more than 25 different areas grouped into four broad categories: governance, total shareholder return, balance sheet and operating performance.
US and Canadian companies with more than $100 mn in market capitalization are covered by the research process – a universe of around 3,400 companies.
The top three sectors remained the same between the second and third quarter of 2019, according to FTI. There was movement further down the ranking, however, with real estate investment trusts (Reits), consumer non-durables and business services moving into the top 10 most-vulnerable industries.
‘Reits and business services may very well be moving to higher vulnerability scores in tandem, which could be correlated given the nature of those industries,’ says Jason Frankl, co-head of FTI’s activism and M&A solutions group, in the research.
‘We will keep a watchful eye on whether we see increased shareholder activism in these industries as we move toward next year’s proxy season.’
Looking ahead to 2020, FTI expects M&A to remain a key theme of many activist campaigns.
‘Developments to this theme in 2019, which we find likely to continue, were traditionally passive managers becoming vocal about understanding the strategic rationale behind mergers and being more open to siding with activists in their campaigns for higher prices in sale processes,’ says Frankl.
Activist activity remains at a high level globally, although not quite at the intensity of recent years. At the end of September, activist investors had launched 159 campaigns, compared with 185 over the same period last year, reports Lazard in its quarterly update on shareholder activism. The third quarter of 2019 helped to bump up the numbers for the year, with 20 percent more activist campaigns than in Q3 2018, adds Lazard.
