Canada is the only G20 country without a national securities regulator. Despite coordination among the provinces and territories, the current regime is often thought to encourage shareholder activism – whether by permitting forum shopping for more favourable regulations or given the reality that decentralized efforts mean scarcer resources to combat unwelcome tactics. However, after decades of discussion and debate, the Supreme Court of Canada released a decision late last year which could lead to the adoption of a single regulator, dubbed the Capital Markets Regulatory Authority (CMRA).
While the Supreme Court judgement paves the way for a pan-Canadian regulator, political and practical difficulties (including Alberta and Quebec’s continued opposition to the unified regime) suggest that it will likely be some time before expectations materialize. Nevertheless, we move one step closer to the implementation of a national regulator and relatedly, a new forum for activist investors:
- A simplified system. Having one body oversee Canada’s capital markets means cross-border securities legislation and streamlined filings. This new framework will allow boards and activists to act quickly and in a cost-effective manner while waging, defending and negotiating activist battles. One can also expect more consistent legal reasoning (in contrast with the Eco Oro decision in which provincial bodies proffered differing views on similar points of law).
- A platform for meaningful disclosure. A centralized regulator creates the prospect of uniform national rules, and by extension, eliminates the incentive for forum shopping. While strides have been made to require purposeful disclosure, provincial and territorial regulators have generally adopted a conservative approach. For instance, in Ontario, the call for gender diversity on boards and in executive positions was met with “comply-or-explain” requirements, as opposed to quotas or Practically speaking, if a regulator was to implement such requirements, companies refusing to comply could simply relocate to another province or territory where quotas or targets do not exist. A pan-Canadian regulator closes such loopholes and allows for more robust disclosure requirements without the fear of losing company listings. In some cases, this may strengthen the basis upon which activists build their platforms, while in others, it may rid of the need for activist efforts where they serve as a stimulus for change or increased transparency.
- Stronger regulatory enforcement. A unified regulator equates to an increase in resources that can be devoted to investigation and enforcement. One could imagine the potential impact which stricter and more consistent enforcement might have upon activist contests. For instance, activist short-selling campaigns are on a rapid rise in Canada. Securities regulators are often called upon to investigate companies or silence short sellers whose social media commentary can now move markets. A single regulator may be empowered with a newfound authority and better equipped to investigate and respond to such allegations.
- Slower reactions to new developments. On the other side of the spectrum, competing provincial interests within the national scheme may mean delayed responses to changes on the ground. New regulations or amendments to legislation will require approval by a council of provincial ministers and the federal Minister of Finance. Any disagreements over proposed changes may thwart the regulator’s ability to react in a timely manner and deliver corresponding guidance. This delay may prolong periods of ambiguity and leave a wide range of options for activist activity in moments of uncertainty.
- Loss of industry-specific expertise. One of the benefits provided by the current structure is the interaction with a regulator familiar with local industries. Given the geographical concentration of certain industries, provincial and territorial regulators often have industry-specific knowledge. For instance, the Alberta Securities Commission is known for having extensive knowledge of the oil and gas industry. With the consolidation of thirteen Canadian regulators, companies and activists may encounter a panel that lacks context or specialized knowledge required to govern certain proceedings or appreciate industry dynamics.
- Substantive changes. Some groups have critiqued the proposed legislation for failing to adopt investor protections. Specifically, initiatives previously available at the provincial level may not be assumed by the new federal body. As an example, the CMRA’s current mandate does not include financial incentives for whistle-blowers or an investor advisory panel, both of which are provincial initiatives implemented by the Ontario Securities Commission. Although the CMRA’s mandate is far from finalized, the loss of such programming may heighten the appetite for activist action.
While the Court’s decision certainly serves as a marker of change, the future of securities regulation remains riddled with uncertainty for companies, investors and activists alike. In the interim, perhaps the US experience is telling: despite having one of the strongest and most well-resourced national regulators, the US still has the most active shareholder activism market in the world. Although the Canadian experience may prove similar, the opportunity has come to place Canada in lockstep with its international peers. Then, the question becomes – for better or for worse?