Canadian businesses will need to begin preparing for a significant increase in activist shareholder actions, according to the Financial Post. Shareholder activism, a phenomenon that has thus far largely been concentrated in the U.S., has been steadily growing in Canada in recent years, and due to favourable regulations here that trend will likely continue.
Canadian laws favour shareholder activism
Until recently, activist shareholders have largely been confined to the U.S., but the fact is that Canadian regulations are much more favourable to shareholder rights and, as such, activist investors are beginning to see Canada as an “activist’s paradise.” One of the biggest differences between U.S. and Canadian laws concerns public disclosure of ownership. While in the U.S. shareholders must publicly disclose ownership after 5 percent total ownership of shares and every 1 percent of total shares thereafter, in Canada the rules state that public disclosure is only required when an investor owns 10 percent of a company’s shares and every 2 percent thereafter.
Other Canadian laws also favour shareholders in disputes against a company’s board of directors. For example, in Canada it is quite common for every director to have the majority support of shareholders due to “majority voting” policies. Also, cumulative voting and staggered board terms, which tend to favour a company’s directors, are quite common in the U.S., but have fallen out of use in Canada. Finally, while U.S. companies can adopt so-called “poison pills” to kill activist shareholder efforts, such tactics are regularly suppressed by Canadian courts and regulators.
How businesses can prepare
Because of this legal climate that benefits activist shareholders, businesses in Canada need to be well-prepared to deal with shareholder activism. A shareholder dispute can often put a company’s board of directors at a disadvantage since the activist shareholders will usually have a plan in place, including legal counsel, public relations, and white papers, before going ahead with a dispute. Therefore, an ill-prepared company can be left scrambling to work out how to respond in a quick and productive manner. While some companies have taken the approach that a board should have as little communication with shareholders as possible, this approach is risky given the Canadian regulatory environment described above.
The best way to avoid shareholder disputes is for a company’s board to maintaingood relations with its shareholders, but that relationship is not always possible, especially as shareholder activism takes on a more prominent role here. Therefore, businesses, no matter how cordial their relations may be with their shareholders, should seek legal advice from a law firm that has plenty of expertise in shareholder disputes and can use that expertise to help a business prepare for whatever shareholder actions may come in the future.