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