Norton Rose Fulbright’s Canadian Special Situations Team ranks in the top 10 of global legal advisors for shareholder activist campaigns

Global law firm Norton Rose Fulbright’s Canadian Special Situations Team has ranked in the top 10 of global legal advisors advising both companies and activists in shareholder activist campaigns and is the only Canadian firm to be represented on the global ranking. The Special Situations Team also advised on the only Canadian campaign to rank in the top 15 global campaigns by target market cap, ranking 5th.

To view the Global Shareholder Activism Scorecard, please click here.

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Corporate governance principles: The start of a new conversation?

On July 21 2016, the CEOs of thirteen high-profile public companies, asset managers and pension and mutual funds released the Commonsense Principles of Corporate Governance. The signatories include some of the most respected names in American business and were headlined by Warren Buffett of Berkshire Hathaway Inc., Mary Barra of General Motors, Larry Fink of Blackrock, Jeffrey Immelt of General Electric, and Bill McNabb of Vanguard. Their open letter states that the purpose of the group was to reach consensus on what “good corporate governance” means in the real world, and that while they recognize that there is significant variation among public companies, they nevertheless intend the principles to serve as “a starting point” for discussion. The principles themselves can be found here, and include among others:

  • Shareholder rights. Dual class voting “is not a best practice,” and a company should consider having specific sunset provisions based upon time or a triggering event.
  • Composition of boards of directors. A subset of directors should have professional experience directly related to the company’s business and directors candidates should be drawn from a rigorously diverse pool.  Boards should carefully consider a director’s service on multiple boards and other commitments to ensure directors can commit substantial time to their roles.
  • Director compensation and director evaluations. Companies should consider paying a substantial portion, as much as 50% or more, of director compensation in equity and require directors to retain a significant portion for the duration of their tenures.  Boards should have robust evaluations and “the fortitude to replace ineffective directors.”
  • Board leadership. A board’s independent directors should decide on the leadership structure and if it decides to combine the chair and CEO roles, there should be a strong independent lead director.  The lead independent director’s roles may include guiding the board’s consideration of CEO compensation and the CEO succession planning process.
  • Board committees. Boards should consider periodic rotation of leadership roles such as committee chairs and the lead independent director.
  • Tenure and retirement age. The principles do not endorse mandatory retirement age or term limits. While board refreshment should always be considered, it should be “tempered with the understanding that age and experience often brings wisdom, judgment and knowledge.”

As might be expected, most of the principles are high level and address issues that have been common sense and conventional. Indeed, many of the practices have already been adopted by most large-cap companies or are already a requirement of stock exchange regulations, such as public reporting requirements or composing boards with complementary and diverse skill sets. That said, some of the principles reflect newer ideas like rotating committee chairs and lead directors and a few are controversial, such as putting limits on dual-class voting.

What is probably most notable about the principles is what they don’t address. As Glass Lewis’ Greg Waters has pointed out, none of the public company signatories themselves have an independent chairperson, which likely ensured that a recommendation for their appointment was not made. The principles similarly neglect a number of prominent issues that shareholders and management still seem to disagree about, including key anti-takeover defences such as poison pills, supermajority vote requirements and staggered boards.

Though the principles may not be particularly ground-breaking or prescriptive, to the extent they can initiate discussion and debate at the board and c-suite level, then they may well have some impact. The prominence of the companies who have signed on will make it harder for boards and companies to argue against the instituting of such core principles and practices, and may shift the burden of proof onto corporations that don’t comply. Moreover, turning one’s mind to sound corporate governance is the first step to developing a practice and culture of transparency, long-term growth and meaningful communication between shareholders and boards. Although every company will have its own way of applying governance principles to its own specific situation, the principles are broad enough to apply in some manner to most, if not all, corporations, regardless of size, industry, or public/private status.

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The author would like to thank Robert Corbeil, articling student, for hisassistance in preparing this legal update.

Activists increase their focus on smaller issuers

Shareholder activism is often associated with campaigns involving large, high-profile issuers. Yet as the Financial Times reports in a recent article, referencing global data from Activist Insight, there has been a slight upswing this year in activism against relatively small issuers.

The data show that from the start of year to the end of July, 61 “micro-cap” companies—that is, companies with market capitalizations ranging from USD $50m to USD $250m—have been targeted by activist funds. 56 micro-cap issuers were targeted over the same period in 2015. In contrast, activism against the largest issuers has experienced a slight slowdown, with 16 companies with market capitalizations over $10b being targeted, compared with 22 over the same period last year. According to the figures, activism against companies worth less than $50m has held steady.

As the article suggests, there are several possible reasons why smaller companies have been gaining increased activist attention. These include:

  • campaigns involving smaller issuers generally demand less financial wherewithal, which may prove especially enticing to smaller funds who are newer to activist investing
  • increased M&A opportunities when smaller companies are involved
  • the potentially increased ability of activists to add strategic value at smaller companies, who may not necessarily have access to the same kinds of legal, financial and strategic advice as larger companies

The article (paywalled) can be accessed here.

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

Board diversity: the latest metrics and government measures

The diversity of boards has become a target of greater scrutiny. This scrutiny has come not only from activist investors seeking higher returns and better governance, but from governments and various interest groups outside the corporation. It has homed in on a variety of director characteristics, including length of tenure, age, gender, and visible minority status. This post begins by discussing some of the latest metrics on board diversity in Canada. It then looks at some of the recent measures governments and regulators have been taking to increase diversity in the boardroom.

Length of tenure

According to a Financial Times analysis, the average length of tenure of directors for the Canadian companies studied is just above 7.5 years. This is among the longest length of tenure for the countries represented in the data. While the United States has a longer average tenure, at roughly 8.5 years, most European countries have lower average tenures, with Norway, Finland and the Netherlands each averaging roughly 4.5 years.


A 2015 study by Spencer Stuart, which looked at 100 TSX-listed companies with revenues over $1 Billion, states that the average age of non-executive Canadian directors was 63 as of 2015 (this study was previously discussed on this blog, in a post by Jenny Yoo). There is also some evidence that age has been increasing. For the companies in the study, the average age of non-executive directors in 2010 was 61.


In 2015, 19.5% of Canadian directors at FP 500 companies were women, according to the Canadian Board Diversity Council’s (“CBDC”) 2015 Report Card survey. This represents a 2.4% increase over 2014. While the Financial Times analysis suggests Canada has a slightly higher percentage of female directors than the United States (roughly 15%), the figure is significantly behind that in several countries, such as France (roughly 37%) and the Netherlands (roughly 42%)—though both have quota systems.

Visible minority status

The CBDC states 7.3% of directors at FP 500 companies report belonging to a visible minority. A paper by Anita Anand and Vijay Jog has suggested that roughly 5.5% of TSX directors belong to visible minorities.

What next?

There is increasing evidence that governments and regulatory agencies are willing to intervene in the area of board diversity. In Ontario, 2014 saw the introduction of a “comply or explain policy” on gender diversity by the OSC. Ontario Premier Kathleen Wynne has also encouraged companies to appoint more women to their boards, stating that by the end of 2017, companies are encouraged to set a target of appointing 30% women to their boards and achieve it within 3 to 5 years of setting it. Attention towards these kinds of measures is not confined to Canada. SEC Chair Mary Jo White indicated in a recent speech that SEC staff will be recommending that the SEC require “more meaningful” diversity disclosure on board members and nominees in proxy statements.

All of this suggests that issuers should be aware of the sharpening focus on the composition of their boards and prepared to explain how board members are chosen.

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

Majority voting and board diversity trends

As recently highlighted in the Harvard Law School Forum on Corporate Governance and Financial Regulation, a report (the Report) by Institutional Shareholder Services (ISS) found that majority voting practices and annual board elections, along with increases in board diversity, are the new norm.

The Report examined the public filings of Standard & Poor’s U.S. “Super 1,500” companies (S&P 1500)  comprised of the S&P 500, MidCap 400 and SmallCap 600 indices from the period of July 1, 2014 through June 30, 2015.

Majority Voting and Annual Elections

Majority voting is now the clear market standard amongst S&P 500 companies, with over 88 per cent of companies in the index having adopted this practice. While larger companies had initially led the way in adopting these “accountability enhancements”, the Report notes that SmallCap 600 and MidCap 400 companies are now adopting majority voting standards at a faster pace than their S&P counterparts had in 2015.

Annual elections have also increased in prevalence, with over 60 per cent of S&P 1500 companies holding annual elections.  The largest jump occurred last year with a rise from 60 to 64 per cent. Over 80% of S&P 500 companies now hold annual elections (and only 84 boards continue to hold staggered elections).

Board Diversity

As discussed in one of our earlier posts, diversity has been a top priority for boards. Advocates for board diversity contend that different backgrounds and perspectives will enhance a board’s effectiveness and will ultimately lead to an increase in diversity throughout the corporate hierarchy.

ISS’ Report indicates that there has been a market-wide increase in board diversity over the past five years. Ninety-eight per cent of S&P 500 boards have at least one female member while 79 per cent have at least one minority board member. While the Report notes that companies with larger market caps have higher levels of gender and ethnic diversity, 90 per cent of MidCap boards and 78 per cent of SmallCap boards have at least one female or minority director, and the numbers suggest that these numbers will continue on an upward trend.

Board accountability and composition continue to inhabit the public corporate governance dialogue. Companies would be prudent to turn their attention to, if they have not already done so, incorporating what ISS calls “the new normal”.

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The author would like to thank Shreya Tekriwal, summer student, for her assistance in preparing this legal update.

Updates to ISS proxy voting guidelines

Institutional Shareholder Services (ISS) is one of the leading proxy advisory firms that makes voting recommendations on public companies’ proxy resolutions. In Canada, ISS’ recommendations on transactions and governance issues can have a significant impact on many shareholders’ opinions, and particularly the opinions of institutional shareholders.

ISS publishes its proxy voting guidelines which explain the policies underlying its recommendations. For 2016, ISS updated certain items in guideline. The updates, as described below, are good indicators of investors’ views toward current issues in the corporate governance landscape.

Director Overboarding

In response to information about the average workload for directors (over 300 hours a year, on average), ISS has revised its overboarding policy to lower the number of boards a director should sit on.  For directors who:

  • are not CEOs, the number of board has been lowered from 6 boards to 4; and
  • do hold CEO roles, the number has been lowered from 2 other boards to 1.

ISS did not make negative recommendations based on this revised “overboarding” definition in the 2016 proxy year. However, for meetings held after February 1, 2017, this policy update will result in a “withhold” recommendation if the director (i) is overboarded and (ii) attends fewer than 75% of its board or committee meetings.

Externally Managed Issuers

ISS has updated its voting recommendation policy for externally-managed issuers (EMIs), being issuers that have management services provided by external management companies.

Where an EMI provides insufficient disclosure about management services agreements and how management is compensated, ISS will make case-by-case voting recommendations for say-on-pay resolutions and director nominations. Where an EMI does not propose a say-on-pay resolution, the updated policy allows ISS to evaluate other factors, including: the size and scope of the management services agreement; executive compensation in relation to similar issuers; related-party transactions and independence; and historical compensation concerns for the issuer.

In Canada, this policy update will likely affect ISS’ recommendations on the election of individual directors of EMIs.

Management and Director Equity Plans 

ISS has also updated its regime for evaluating equity plans. Whereas ISS’ former system was based on a series of standalone pass/fail tests, the new evaluation system uses an Equity Plan Scorecard (Scorecard) with a holistic approach to evaluating equity plans. The Scorecard considers equity plans’ strengths and weaknesses based on plan cost, plan features and historic grant practices. The Scorecard takes into account considerations such as: the viability of risk-mitigating measures; the strength of vesting provisions; and the use of performance-based equity.

Further information on this Scorecard is available here.

Issuers should be mindful of the updates to ISS’ guidelines and the ways such updates might affect the ISS’ voting recommendations on meeting proposals in 2017.

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Key takeaways from the 2016 proxy season in the US

The EY Centre for Board Matters (EYC) recently published its annual report setting out key takeaways from 2016’s proxy season in the United States. Canadian issuers should take note of the developments in the US as trends south of the border will impact the proxy landscape in Canada.

Investor Communications

One of the takeaways from the 2016 proxy season was that proxy circulars have developed into a tool for communication to investors. For more companies, this annual disclosure is being used to engage investors by communicating companies’ goals and guiding principles.

Further, over the last few years, proxy disclosure has become more reader-friendly, incorporating tools such covering letters to shareholders, executive summaries, information in tabular form and enhanced formatting and graphics.

Environmental Considerations

Environmental and social concerns were a leading theme in shareholder proposal submissions in 2016.  EYC reports that support for proposals on climate risk jumped from 7% in 2011 to 28% in 2016.

Successful environmental shareholder proposals have included a proposal for a company to issue a sustainability report with greenhouse gas emissions reduction goals and a proposal for a company to report on methane emissions. Environmental shareholder proposals this year also dealt with topics such as political spending and lobbying and labour and human rights practices.

Proxy Access

In a previous post, we discussed the trends in the US, and, to a lesser degree, in Canada, toward proxy access and the use of proxy access by-laws.  The EYC report confirms that this topic continues to be a live issue for companies in 2016.

Proxy access allows shareholders to influence who governs a company by giving certain shareholders the right to nominate candidates to the board of directors.  According to the report, a third of S&P 500 companies have adopted proxy access provisions over the last two years. This year almost 200 companies received proxy access shareholder proposals in advance of their annual meetings. Sixty per cent of such companies adopted proxy access by-laws prior to their shareholders’ meetings.

Typically proxy access by-laws allow a shareholder (or a group of up to 20 shareholders) to make director nominations if it holds 3% of the outstanding shares of an issuer for at least 3 years. Such shareholders may nominate up to 20-25% of a board.

Key Lessons

EYC’s takeaways from the 2016 proxy season may be valuable to issuers as they plan for their 2017 shareholder meetings.  These takeaways, particularly the concerns expressed in shareholder proposals, may also help inform boards and management with respect to the strategic direction for their companies in the coming months.

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Litigation Flashpoints

Proxy contests spill over into court for many reasons, but there are certain flashpoints of which both activists and issuers should be mindful.  For activists, these are pitfalls to avoid, while for issuers they may represent opportunities to push back on sharp tactics and maintain a level playing field in the struggle for shareholders’ votes.

Some common reasons for which parties may find themselves before a judge include:

  • Securities disclosure requirements: Securities laws require disclosure of positions at specific thresholds, and these requirements can vary from one jurisdiction to the next. An activist wants to focus on its message for shareholders, not be dragged into the distraction of defending itself from allegations it is offside securities laws.  From an issuer’s perspective, these statutory filings may be the first evidence that an activist wants to make a move on the company.
  • Inadvertently acting in concert: Seeking support from fellow shareholders is integral to an activist campaign, but in doing so would-be dissidents should be careful to avoid communications or agreements that could result in them being considered by a securities regulator to be acting in concert, which could cause the activist to accidentally pass disclosure or even takeover bid thresholds.
  • Don’t get carried away: Securities laws prohibit false or misleading statements, and the defamation suit has a prominent place in the special situations litigator’s toolkit. For both activists and issuers, the solution is a simple one: speak with the facts, and avoid making up new ones.
  • Be careful with social media: Just because an appeal to shareholders is made in a tweet doesn’t mean there aren’t applicable securities laws. Be mindful of, for example, shareholder solicitations made on social media which could trigger regulatory filing requirements.
  • The bylaws set the rules: Issuers are increasingly adding disclosure requirements and other rules to control the parameters for of the proxy playing field long before an activist investor emerges onto the scene. Activists need to do their research and, if an activist wants to challenge a provision in the issuer’s bylaws, the activist should be prepared to go to court.
  • Standstill agreements: Parties who agree to a standstill should choose their language carefully, or else an issuer could find itself confronted by an activist challenger much sooner than they believed they had bargained for. Conversely, an activist that believes it is outside a standstill could have its campaign stopped in its tracks if a court disagrees with its interpretation of the contract.
  • It’s not over until it’s over: Winning a campaign is not necessarily the end of the threat of litigation for the activist. Where there is a sale of the company closely following a successful campaign, the activist can face a claim, which could come in the form of a class action, alleging that the newly elected directors breached their duties to the issuer.

For all of these, the best and most important precaution that an activist or issuer can take is to hire counsel experienced in proxy disputes and securities laws.  Indeed, lawsuits are infrequent precisely because it is uncommon for activists to launch proxy contests without hiring external consultants to help them navigate the legal waters, and issuers are well-advised to take the benefit of similar expertise.

Unintentionally landing in court is expensive, distracting, and usually unpleasant.  It should never happen by surprise.

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Should companies expect an increase in short-selling activism in Canada?

Success breeds imitation. The persistence of that cliché is good evidence of its accuracy.  Its implications, however, may be a warning call with respect to shareholder activism in Canada.

The woes of Valeant Pharmaceuticals International Inc. (“Valeant”) and its share price have been well documented in the media. Following a report by Citron Research, who held a short position in Valeant, alleging improper revenue recognition, Valeant’s shares fell precipitously: on the day prior to the report, October 20, 2015, Valeant’s shares closed at $190.85 (CDN) on the TSX.  On October 22, 2015, Valeant’s shares closed at $144.05.  By now, Valeant’s shares have declined to under $40, albeit not solely on the basis of Citron’s allegations.

It is not my intention to recite in depth the news surrounding Valeant. Its plight does, however, highlight an important form of activism that should not be overlooked: short-selling activism.

In broad strokes, the practice of short-selling activism involves an activist taking a short position on a company, while publically identifying reasons why the share price is overvalued – often (but not always) through explosive allegations of fraud or criminality. The practice is not particularly new, with well documented cases of public shorts in North America in 2011 and 2012, but the Valeant case represents one of the largest, most notorious, and most consequential public short in Canada in recent memory.  It is a fair assumption that this notoriety may lead to an uptick in short-selling activism, and it is an issue that boards should be prepared to address.

Traditional shareholder activism generally seeks to increase a corporation’s share price, at least in the short term. Short-selling activists, in contrast, only profit when a company’s share price declines.    The dissimilar incentives as between shareholder activism generally and short-selling activism means that responding to this unique form of activism, or being prepared in advanced to respond to it, presents unique challenges.

We have outlined strategies for responding to shareholder activism in the past, and our Special Situation Team, in collaboration with The Boston Consulting Group and RBC Capital Markets, has released a white paper addressing defensive strategies to shareholder activism.  Many of these strategies, including engagement with long-term shareholders, good governance, and proactive board involvement in value creation, remain relevant and important to defending against virtually all forms of activism.  Engagement with the activist, however, which may be beneficial in responding to traditional activism, has little to recommend itself in the context of short-selling activist, as it is effectively a zero-sum situation: there can only be one winner when one party seeks value creation and the other value destruction.  Consequently, a board should be prepared to adopt a significantly more aggressive strategy in dealing with a short-selling activist, and should expect the activist to respond in kind.

Policy activists get tough on climate change

As we previously predicted in a 2014 article, The Rise of Policy Activists?, policy activism in Canada is gaining speed. In this year’s upcoming proxy season, a hot topic for policy activists is the potential transition to a global low-carbon economy.

Canada is currently working towards a national climate change plan and one of the tools being considered is a national carbon tax. If implemented, energy companies would be required to pay a national tax on greenhouse gas emissions.

One of Suncor’s shareholders, NEI Investments, filed a shareholder proposal last month demanding that Suncor address its long-term survival plans. In particular, it demands that Suncor “provide ongoing reporting on how it is assessing, and ensuring, long-term corporate resilience in a future low-carbon economy.”

NEI Investments’ proposal will be put to a shareholder vote at Suncor’s annual general meeting on April 28, 2016. While shareholder proposals are technically non-binding even if they receive a majority of votes, this proposal has Suncor’s support and Suncor has even recommended that shareholders vote in favour of the proposal.

NEI Investments explains its position in a report entitled The End of the World as We Know It: Transitioning to a Low-Carbon Energy System. It states: “We believe the energy transition is already underway and change is now inevitable. As a result, investors face both risks and opportunities, but more importantly, we believe investors have a responsibility to actively drive this transition.”

South of the border, shareholders of Exxon – the world’s largest publicly traded oil company – recently brought a similar proposal requiring Exxon to account annually for the risks of climate change legislation. Exxon objected, arguing that the proposal was vague and that Exxon already published carbon-related information for shareholders on its website. The US Securities and Exchange Commission, however, found that Exxon’s public disclosures do not appear to “compare favorably with the guidelines of the proposal” and ordered the shareholder resolution to be put to a vote at Exxon’s annual meeting this May.

While the specifics of Canada’s climate policy remain to be seen, it is clear that a climate change plan is on the agenda for Canada and other countries around the world. Policy activism will continue to rise as investors become increasingly conscious of the risks of climate change.

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