Activists Knocking on the Door

The Canadian Real Estate sector may be in for a shake-up. Reuters recently reported (here) that activists may be eyeing real estate investment trusts (REITs), and their approximate combined C$67 billion in market capitalization, as ripe targets for activist campaigns in light of: attractive prices, vulnerability in the market based on uncertainty surrounding the effects of interest rate shifts, and potential opportunities to unlock unrealized value.

In particular, with the Canadian REIT index down approximately 7% since August 2016, activists may ramp up efforts to target REITs for activist campaigns. Recent interest rate hikes may have the further effect of exacerbating vulnerability in the real estate sector and inciting further activist initiatives. Reuters attributes the appeal of REITs, as targets for activists, as a function of:

  • perceived corporate governance issues (including high management and board compensation);
  • underperforming stock results; and
  • recent successes in the REIT space for activist campaigns.

The potential uptick in activism may manifest in a number of ways. Capturing value in REITs that trade at a discount may be achieved by activists through various channels. By working constructively behind the scenes to generate value-enhancing solutions, activists may seek to close the gap between market price and net asset value by: boosting returns through asset sales, recapitalizing and consolidating, requisitioning shareholder meetings, or publicly announcing intentions to nominate alternative directors.

In Kingsdale Advisors’ annual Proxy Season Review for 2017, which we recently reported on (here), Kingsdale reported that the most active sector for proxy fights was the materials sector, followed by information technology and real estate. Shifting tides appear to be on the horizon for this historically robust corner of the Canadian economy. Further significant activity may be on the way.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.

Trends and Predictions in Canadian Proxy Contests

Kingsdale Advisors (Kingsdale) recently released its annual Proxy Season Review for 2017. The report examines trends observed in 2017 and provides analysis on what the future may hold for Canadian proxy contests. The report also outlines strategic recommendations for Canadian companies.

Looking back – trends from 2017

  • Shareholder activism: alive and well. Kingsdale reports that despite a drop-off in the number of public campaigns so far in 2017 (21) as compared to 2015 (55) and 2016 (33), the number of public campaigns to-date demonstrates the continued prevalence of activism in Canada with respect to public companies. The report further notes that despite fewer public proxy fights this year, 70% of fights were won by activists with respect to some or all objectives. The success rate in 2016 was just 33%, down from 55% in 2015. Kingsdale attributes the increased levels of success to the following:
    • First, the increased scrutiny and selectiveness of activists at the front end before launching into activism;
    • Second, proxy advisors are more willing to endorse properly structured activist campaigns with positive voting recommendations; and
    • Third, activists may be more willing to accept a partial win when stock prices are up.
  • Compensation: Proxy Advisor scrutiny on the rise. This year Kingsdale tracked a record number of ‘against’ say-on-pay recommendations (18 from ISS and 12 from Glass Lewis). Of the 18 companies that received an ‘against’ recommendation by ISS, just four failed their votes. Kingsdale further noted that 2017 yielded the highest number of companies failing to reach the 75% ISS threshold for support. Kingsdale attributes this increase to two factors: an indication of shareholders’ increased activeness on pay issues, and the increase in total number of ISS recommendations. Kingsdale prescribes more board diligence as the primary means of addressing this uptick, to combat potential compensation controversies before they surface.
  • Key Governance Developments. Some key governance developments identified by Kingsdale include:
    • The emergence of virtual AGMs. Virtual AGMs have been taking place in the U.S. since 2009. However, they have been almost non-existent in Canada. ISS has announced that it is currently soliciting feedback on the use of virtual meetings as part of its 2018 policy survey;
    • The TSX released additional guidance regarding majority voting and advance notice policies for TSX-listed companies. According to Kingsdale, the TSX belief that current proxy advisor guidelines for the notification periods are acceptable, as they relate to advance notice, is particularly noteworthy. While the TSX noted several provisions that it considers inconsistent with advance notice policy objectives, Kingsdale expects these concerns to be formally reflected in the advance notice provision guidelines of ISS in the coming year; and
    • In light of recent proxy access proposals, Kingsdale advises that issuers should expect to receive proxy access proposals in the future.
  • What chilling effect? Despite widespread anticipation that the adoption of the new hostile takeover regime signalled the beginning of the end, seven hostile bids were launched since the rules came into effect on May 9, 2016. This represents the same number of hostile bids launched in 2014 and one more than the total number launched in 2015. The number of hostile bids has remained constant but the tactics employed by such bids have changed. Some keys to success under the new rules include: potential bidders approaching targets with win-win value propositions, entering hostile bid situations with larger numbers of shares locked up in advance and making cash offers.

Issues on the Horizon

Looking ahead, Kingsdale identifies several issues on the horizon for public companies:

  • Environmental, social and governance issues in the limelight. Environmental, social and governance (ESG) issues are increasingly on the radar of investors and ESG considerations can often drive investment decisions. Kingsdale warns that, given ESG trends, issuers should brace for increased demand of enhanced disclosure. Investors are increasingly confident that long-term sustainability can co-exist with long-term results. Issuers should expect more scrutiny on ESG issues from investors moving forward.
  • The Active Passive investor. Activist action need not necessarily be catalyzed by traditional short-term activists. Kingsdale notes that passive investors can no longer be considered passive when it comes to governance and voting and points to the increasing trend of withhold votes against directors on S&P/TSX Composite companies as a likely indicator that more index funds are willing to vote against directors on key governance issues. Institutional investors are directing more resources into building internal governance teams and actively engaging the companies they own to incite higher standards of corporate governance and transparency in reporting as a means of helping to create value.


The report closes with Kingsdale’s advice for the coming year, and emphasizes two points in particular:

  • Evolving role of proxy advisors. Kingsdale alerts issuers to the constantly evolving role of proxy advisors. In particular, Kingsdale notes that proxy advisors have been tightening their policies. In turn, this impacts the outcome of contested meetings, standard annual meetings and transactional meetings. Management should take note and spend time with governance advisors to anticipate proxy advisors’ concerns. Kingsdale predicts that the role of proxy advisors will continue to grow, particularly in respect of the importance of proxy advisors’ vote recommendations.
  • Friendly deals: a relic of time gone by. Kingsdale reports that straightforward friendly deals are a thing of the past. The routine merger or plan of arrangement now comes with increased risks and friendly deals are no longer the sure thing they once were. The increase in shareholder intervention in transactional matters is demonstrative. To ensure deals are more resilient, boards should know their shareholder base and the valuations put on the business. Another key tool to keep in the toolbox of boards is voting lock-ups. Should an activist emerge, the board should resort to a previously established contingency plan.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.

Defamation lawsuits as a defence to shareholder activism

Activist investors engaged in proxy fights typically mount aggressive public relations campaigns in order to undermine shareholder confidence in a target company’s performance and leadership, whether through social media, online forums or by using the more traditional PR channels. In response, target companies have turned to a number of defensive measures, many of which have been previously discussed on this blog. As part of their proxy defence playbooks, target companies may threaten or actively pursue legal action, such as by filing complaints with securities regulators or by suing for defamation.

Naturally, the decision to commence legal action must take into account a broad set of contextual factors and must not be made rashly—in many cases the potential risks associated with litigation may far outweigh any possible benefit. This is particularly true where a protracted defamation lawsuit may result in the airing of the company’s dirty laundry, or where management wants to resolve the issue quickly and discretely. Despite these risks, legal action may nonetheless be worthwhile, especially where management is confident in its position and does not anticipate a quick settlement of the issues. Not only does legal action increase the financial stakes for the activist investor, but it also provides management with another venue to tell their own side of the story.

So, what should target companies watch for when weighing the benefits and limitations of bringing a claim for defamation, and how can activist investors protect themselves from the threat of this type of legal action?

On the part of management, careful consideration must be given to factors including the probability of success in court, the reputational consequences of bringing legal action, the likelihood of embarrassing revelations being made public, and how legal action feeds into the broader defence strategy. In addition, Ontario and Quebec have recently adopted anti-SLAPP (which stands for ‘Strategic Litigation Against Public Participation’) legislation; a development that only adds to the complexity of this decision-making process. These statutes, which aim to prevent certain interest groups (typically large companies) from using strategic lawsuits as a weapon to silence or punish their detractors for communications made in the public interest, may be used by activist investors to challenge management defamation lawsuits. At this point, no activist investor has successfully used Canadian anti-SLAPP legislation to bar a defamation suit. However, target companies would be well-advised to keep a close eye on the future development of case law (such as the ongoing dispute in Thompson v. Cohodes, 2017 ONSC 2590).

For activist investors, the most important precaution to take is to carefully vet all communications before their public release. While the complexity of Anglo-Canadian law on defamation means that a full-blown discussion of the issues is not possible here, there are key points that activist investors should keep in mind. Perhaps most essential is that intent is irrelevant. The courts may find a statement to be defamatory even in the absence of any ill-will on part of the utterer. Activists should also be aware of the most common defence to a claim for defamation, namely the truth of the statement. Wherever an utterer can show their statement of fact to be substantially true, the plaintiff’s claim fails. Finally, activists should be careful to frame any comments as opinion based in fact and not as statements of fact. This may provide the activist with recourse to another commonly used defence to a defamation claim—the defence of ‘fair comment’, which protects utterers from commenting on matters of public interest.

There is no doubt that the competition for shareholder support will often lead to tense exchanges between target companies and their detractors, and that in the midst of these fights it can become difficult for either side to take the necessary precautions. But ultimately, the ability of a party to remain composed and to make well thought-out decisions with the help of its advisors will allow it to avoid becoming a party to costly litigation that is detrimental to its proxy fight strategy.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Felix Moser-Boehm, summer student, for his assistance in preparing this post.

Expect the Unexpected: What Boards can do to Plan for Crises

As a standard precaution, boards should take steps to handle potential crises before one arises. This is particularly so in light of the increasing risk of cybercrime and privacy breaches, and the broader impact of negative social media attention faced by all companies for a variety of reasons today.

According to a recent article in the Harvard Law School Forum of Corporate Governance and Financial Regulation, 65% of CEOs say that their companies have experienced a crisis in the past three years. In the article, Paula Loop discusses how boards can adequately prepare for a potential crisis in order to minimize any negative impact to a company’s operations, efficiency and reputation.

Start Talking and Make a Plan

As a starting point, crisis management should be a regular topic of discussion at the board level. Ms. Loop suggests that crisis management be included on a board’s agenda on an annual basis.  Ideally, companies should also implement (and regularly review) a crisis management plan setting out who will be involved in responding to a crisis and the roles and responsibilities of each individual.  It may also be helpful to discuss how other companies have handled crises, what made their actions successful, and how any responses could have been improved in formulating a response plan for future crises.

Define “Crisis”

Sometimes, it is clear that a crisis has occurred. Other times, it is not always apparent that an issue has been elevated to the level of becoming a crisis.  For this reason, it is crucial that directors work with management to define the scope of a crisis, so that all parties are on the same page in the event of a crisis.  One key means of achieving this goal is by identifying triggers that would require management to inform the board of a crisis or potential crisis.  Ms. Loop identifies the following examples of potential triggers that would require management to escalate an issue to the board: (i) people have been hurt, (ii) company property has been severely damaged, (iii) the crisis will have a significant financial impact, (iv)  critical systems are offline for a specified period of time, and (v) an event occurs that is getting significant negative social media attention.

Review Feedback Throughout

Ms. Loop suggests that, during a crisis, boards should regularly review internal and external feedback on how the company is handling the situation.  To effect this, boards should ensure that they receive regular updates from management and monitor messaging with stakeholders.  If necessary, boards should consider appointing a special committee to help with overseeing how a crisis is being handled.

Debrief Post-Crisis

As relieved as everyone may be after a crisis has ended, the work is not over. In order to improve future crisis responses, management and the board should debrief with each other and other key stakeholders to reflect on what went well, what went poorly, and how any actions may be improved going forward.

Stay connected with Special Situations Law and subscribe to the blog today

The author would like to thank Sadaf Samim, summer student, for her assistance in preparing this post.

Investors heating up the conversation on climate change

Shareholders are placing increased value on non-financial factors when making investment decisions. Some of these factors are environmental and social issues. In particular, shareholder proposals on climate change have recently gained some traction.

In 2016, a record breaking number of climate change resolutions were filed. This shift in focus is attributed to the 2015 Paris Accord, where 195 nations committed to take measures to mitigate global warming. The accord’s objective was to garner a global response to climate change, and it succeeded in enlisting a pledge from these nations to limit temperature increases to well below 2 degrees Celsius.

Interestingly, this year, there have been 3 climate change shareholder proposals that were passed during the 2017 proxy season in the United States despite boards’ recommendations to vote against these proposals. The boards argued that the information was already included in other reports, that there were strategies already in place addressing the risks of a lower carbon economy, and that there are no regulatory requirements developed at this time. The passing of the shareholder proposals is a bold step, which reflects shareholders’ interest in companies’ actions to meet the Paris Accord commitment.

Today’s investors are taking proactive steps to ensure the long term viability of their investments rather than reacting to regulatory changes. An asset management firm boldly asserted: “[a]s a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite—when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations”. This signals to companies whose assets and businesses are subject to climate change risk to take a more proactive approach to address climate concerns.

Stay connected with Special Situations Law and subscribe to the blog today

The author would like to thank Maha Mansour, Summer Student, for her assistance in preparing this legal update.

Alberta Securities Commission declines to exercise public interest jurisdiction to terminate soliciting dealer arrangement in proxy fight

In its recent PointNorth Capital Inc. decision, the Alberta Securities Commission (ASC) was called upon to consider the appropriateness of a soliciting dealer arrangement that had been entered into by the issuer, Liquor Stores N.A. Ltd., in the context of a proxy fight. The arrangement was intended to address management’s constrained ability to solicit proxies due to the fact that many of the shareholders were “objecting beneficial owners” who could only be contacted indirectly through brokers.

The ASC dismissed the application by dissident shareholders of Liquor Stores, the PointNorth limited partnerships, for orders requiring Liquor Stores to terminate the arrangement, which involved payment to a group of IIROC member dealers to solicit shareholder votes in favour of the incumbent slate of directors at an upcoming shareholders meeting.

Pursuant to the arrangement, Liquor Stores agreed (1) to pay a Dealer Manager a work fee of $100,000 for services rendered in connection with the formation and management of a Soliciting Dealer Group, and (2) a solicitation fee of $0.05 per common share to any member of the Soliciting Dealer Group that facilitated the valid voting by a retail beneficial shareholder of his or her shares in support of each member of the Liquor Store’s slate of directors, to a maximum of $1,500 per beneficial shareholder.

Conceding that the arrangement was not specifically prohibited under Alberta securities laws, the PointNorth applicants asked the ASC to exercise its general “public interest jurisdiction” under s. 198(1) of the Alberta Securities Act to make the orders requested.

The Commission declined to do so, concluding that the Plan was not “clearly abusive” of Liquor Stores’ shareholders or the capital markets in general. In particular, there was no evidence that anyone was actually harmed by the arrangement. In the absence of evidence, the Commission refused to assume that members of the dealer group would violate their legal and ethical duties to their clients for the possibility of earning $.05 per share voted in a particular manner, or that members of the board of Liquor Stores would improperly use corporate funds to put their interests ahead of their fiduciary duties.

Following the decision of the Ontario Securities Commission in Re Canadian Tire Corp. and decisions of the ASC in Re Perpetual Energy Inc. and Re ARC Equity Management (Fund 4) Ltd., the ASC affirmed that in the absence of a breach of securities law, its public interest jurisdiction should only be exercised to address a clearly demonstrated abuse of investors and the integrity of the capital markets.

It rejected the PointNorth applicants’ submission that a standard lower than that of “clearly abusive” ought to apply, given that Alberta securities law was silent on the propriety of such soliciting arrangements. Alberta securities laws set out comprehensive and detailed requirements for proxy solicitation and the conduct of brokers, and did not proscribe soliciting dealer arrangements. In the circumstances, it would create considerable uncertainty if the Commission was to base its decision on a standard lower than that of “clearly abusive”.

The ASC’s approval of the soliciting arrangement in issue provides a useful precedent for proxy contests in Canada. Its comments about the circumstances in which it will exercise its public interest power in the absence of a breach of securities law or evidence of demonstrable harm indicate that it will continue to exercise restraint and avoid use of that jurisdiction to impose new policy requirements on market participants.

Stay connected with Special Situations Law and subscribe to the blog today.

This commentary was originally posted on Norton Rose Fulbright’s Securities Litigation and Enforcement Blog.

The authors would like to thank Milomir Strbac, Summer Student, for his contribution to this article.

Social Media: Shareholder Activism in 140 Characters or Less

Social media has changed how we live. We have access to extensive information and global connections at our finger tips.  Given its already well-established presence in our personal lives, it comes as no surprise that social media has become a popular platform for campaigning activists.  In fact, 2017 marks one decade since an individual shareholder of a web service provider voiced his disagreement with the company’s business strategy on YouTube. The videos ultimately resulted in the replacement of the company’s chief executive and opened the floodgates for activist shareholders.

Twitter has been the platform of choice for a famous American activist shareholder. Seth Oranburg, a Professor of Law at Duquesne University, in an article titled “How Twitter is Disrupting Shareholder Activism”, hypothesized that the 140 character limit on tweets offers activists a preferential mode of persuasion: shareholders who would not otherwise read a proxy statement spanning hundreds of pages might respond to a short tweet.

The Edinburgh Centre for Commercial Law Blog reported that activists have also launched websites – such as MoxyVote (now defunct) and Carl Icahn’s Shareholders’ Square Table – to provide online spaces for shareholders to lobby and discuss changes to corporate governance.  The power of these platforms was evidenced in 2009 when shareholders used MoxyVote to reject a takeover bid, forcing the bidder to improve its offer by nearly 25%.

Social media is not just a tool for activists or dissidents. A recent Edelman article suggested companies incorporate social media into their defence strategies before activist shareholders can control the narrative:

  1. Use social media platforms to help tell a story. Multimedia content, such as blog posts and visual content, can help executives tell their shareholders a more compelling story. Videos, in particular, can be entertaining and do not demand much effort on the investor’s behalf.
  2. Target audiences with paid ads. Companies can use paid ads to reach out to investors and to ensure their stories are prioritized in search results.
  3. Use a cross-channel social media strategy. Companies can use social media to push out their own narratives and to direct traffic back to company websites built to counter activists.
  4. Establish a platform to respond to shareholders. Deploying “microsites” that deal with specific issues during contests allows companies to share more of their own content with investors and media while simultaneously providing a medium for companies to respond to dissident actions.

Social media is trending in 2017. Both activists and companies can leverage the power of real time information distribution to stimulate and also to ward off change.  Issuers should be aware of the risk involved in using social media which may result in the market place receiving misleading and unbalanced information.  The Canadian Securities Administrators have published a notice that tells issuers to be aware of disclosure obligations that may be triggered when using social media as a channel to communicate with investors.  Character limits welcome unbalanced, selective and misleading disclosure, which may cause concern under securities laws.

Please do not hesitate to contact Norton Rose Fulbright lawyers for assistance with your social media campaign.

Stay connected with Special Situations Law and subscribe to the blog today

The author would like to thank Elana Friedman, Summer Student, for her assistance in preparing this legal update.

How independent are independent directors?

Board independence is a pillar of good corporate governance. It ensures that a corporation’s management is properly monitored and that the corporation’s decisions effectively balance the various stakeholders’ interests. Over the past decades, Canadian regulators (with support from investors) have required companies to increase the number of independent directors on their boards and have created stricter requirements for what qualifies as ‘independent’. But are independent directors now truly independent?

In a US paper published by Kastiel and Nili, the authors argued that independent directors today, while technically independent, are functionally still very dependent on management. This is because of the directors’ “informational capture” – lacking the time, adequate resources, and specific knowledge to properly obtain, digest, and analyze extensive and complex information that modern boards evaluate. This informational gap often causes independent directors to rely on the information management provides, or conceals, and the way that information is provided.

The authors outline four reasons for this informational capture:

  1. outside directors usually lack direct access to company information, and thus rely heavily on management as their source of information;
  2. outside directors are often exposed to voluminous information, but lack the resources to properly analyze it all in a timely fashion;
  3. while outside directors have general business skills, most of them lack relevant company or industry-specific knowledge, which often takes a few years of board membership to properly acquire; and
  4. lack of information often facilitates other behavioural biases, such as groupthink, which then further solidifies the directors’ reliance on management for information.

The rise of super directors

To address this issue, some activist shareholders have been pushing for what the authors call “super directors”—activist-nominated directors who have the full resources, and analytic strength, of the (often institutional) investors that nominated them. Such institutional support allows super directors to collect, analyze, and edit voluminous information in a timely fashion, and share their results with the rest of the board, who now have a new source of information.

Super directors, however, are only a temporary solution to the problem. First, most companies are not targeted by activist investors, and thus don’t benefit from such directors. Even when they do, super directors are only there for a few years, and don’t leave behind any organizational knowledge for the other directors to rely on once they exit. Additionally, activist directors may be prevented from accessing some of the corporation’s information, or sharing it with their team due to conflicts of interest. Finally, those directors, like their nominating shareholders, may only have short-term plans for the company.

Board suites

For a more effective solution, the authors suggest the creation of a “board suite”—full-time special informational counsel to the board. Such counsel would request, summarize, and prepare information from management, as well as assess the completeness of the information provided. The suite would become the institutional knowledge base of the board, unaffected by the change in directors. Board suites could also take over some of the shareholder engagement tasks, particularly those who are data/information driven. Similarly, it could also help in establishing long-term relationships with key shareholders, and prevent miscommunications since, unlike directors, the suite would be a constant in the board.

The proposed board suite doesn’t come without its own problems – such as increased administrative costs and potential difficulties in its implementation – but it does highlight a serious issue that corporations and shareholders alike need to turn their minds to. If good corporate governance is actually to be achieved, management, directors, and shareholders must all work together to ensure that the independent directors are getting, and understanding, all the necessary information to properly make decisions.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Ahmed Labib, summer student, for his assistance in preparing this legal update.

Trends and Strategies for Companies Involved in M&A Transactions

In a report entitled “M&A Activism: A Special Report”[1] (the Report), the editor-in-chief of Activist Insight describes the types of companies most at risk of being targeted by shareholder demands, providing steps that can be taken to increase the resilience of M&A transactions.

The Report identifies a number of trends and findings, as summarized below:

  • Deal Prevention: M&A demands from shareholders have increased in recent years in both Canada and the United States, most commonly by activists seeking to prevent deals, to pursue appraisal rights, and to make their own takeover bids. Notably, 45% of Canadian shareholder activism between 2010 and the end of 2016 were intended to prevent deals, compared to 21% in the United States.
  • Target Profiles: The Report provides insight into the types of companies most at risk of being targeted by shareholder demands. Basic materials as well as services and technology companies are most frequently targeted by demands for M&A transactions in both the United States and Canada. Demands are often directed at companies with a market capitalization below $2 billion.
  • Defense Tactics: Steps can be taken to ensure the resilience of M&A transactions proposed by companies. Having a well-defined business strategy and keeping on message with that strategy is a strong defense to any activist attack. Communicating and pursuing voting lock-up agreements with influential shareholders early and frequently are also recommended tactics.
  • Proxy Advisories: The Report emphasizes the important role played by proxy voting agencies in determining ultimate levels of shareholder support or opposition. Proxy voting agencies will often ignore fairness opinions commissioned by sellers where detailed financial analysis is not included in the opinion. Longstanding shareholders may oppose M&A transactions where they believe a stock that they own is not being sold at an optimal price or at the wrong time.
  • Deal Structure: According to the Report, deal structure is important in predicting a transaction’s ultimate success. Activists scrutinize the deal process and boards are held to a high optical standard, meaning a deal cannot appear to be quick or unexpected to shareholders. Consideration should be given to the potential risks and consequences of: (i) dead votes, where shareholders of record sell before voting or before a revised bid is made; (ii) mergers requiring shareholder votes, particularly if the consideration is entirely or partially stock-based; and (iii) deal protections, such as no-shop clauses and termination fees, which can aggravate investors due to the transfer of risk from the buyer to the shareholders’ meeting.

It is important that companies pay attention to their susceptibility to opportunistic M&A demands and to consider strategies to protect themselves adequately. A full copy of the Report can be obtained here.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Brandon Burke, summer student, for his assistance in preparing this legal update.

[1] Josh Black, Activist Insight, “M&A Activism: A Special Report” (2017) Harvard Law School Forum on Corporate Governance and Financial Regulation.

Fasten Your Seatbelts: Preparing for the Globalization of Hedge Fund Activists

Activist hedge funds have grown up and gone global, reinforcing the need for companies of all shapes and sizes to plan ahead for the possibility of an attack. A recent article by Martin Lipton in the Harvard Law School Forum of Corporate Governance and Financial Regulation reviews recent developments in the activist landscape and reconfirms the importance of preparing for an attack.

The Fight Has Gone Global

One recent development is the expansion of hedge fund activism across the globe within the past two years. Mr. Lipton suggests that activism typically associated with the American marketplace is quickly gaining traction abroad. According to the Activist Investing Annual Review 2017, a total of 758 companies worldwide received public shareholder demands in 2016, a 13% increase on 2015’s total of 673.

The growth of activist hedge funds in Europe and Asia have, in a large way, contributed to this worldwide increase. 97 European companies faced public activist demands in 2016, up from 72 in 2015, and predictions for 2017 suggest this number will continue to grow. The result of the Brexit referendum, far from scaring investors away, seemed to unlock potential for investors – both the UK and continental Europe experienced an increased presence of American hedge funds and institutional investors. US hedge fund investments in Europe are up 20% in 2017 as of July 4th and many funds will be looking into activist opportunities to boost the return on their investment.

Activism in Asia, on the other hand, has tended to take a slightly different form than that in North America, with the investment community favouring behind-the-scenes negotiations over public demands. Despite this, hedge fund activism in Asia is still experiencing major growth, rising from 52 public activist demands in 2015 to 77 in 2016. Japan, in particular, has opened its doors to shareholder and hedge fund activism, as part of Prime Minister Shinzo Abe’s plan to revitalize the country’s economy, and many activists are waiting to sink their teeth into these previously non-activist-friendly markets.

The growth in Europe and Asia is balancing out the relative stabilization in North America and Australia, with Canada experiencing a slowdown of companies facing public activist demands: 49 in 2016, down from 60 in 2015. However, far from taking this as a sign for Canadian companies to kick their feet up, Mr. Lipton argues that this global trend indicates that no company, no matter its size, success, popularity or location, should believe they are safe from a potential attack from activists.

Stay Prepared

In a previous post, we outlined some strategies for defending against an activist attack.  The key to a successful defence lies in advance preparation, including maintaining and strengthening shareholder relations, preparing the board for an activist attack, and monitoring market activity and attack indicators. With the strength of activist hedge funds growing worldwide, it is important now, more than ever, for companies to brace themselves for impact and decide whether to negotiate with activists or gear up for a fight.

Stay connected with Special Situations Law and subscribe to the blog today.

The author would like to thank Abigail Court, Summer Student, for her assistance in preparing this legal update.