Aurora/CanniMed: Canadian securities regulators provide guidance on takeover bids in Canada – Expect to see more hard lock-ups and fewer tactical poison pills

The Ontario and Saskatchewan securities regulators (the Commissions) have released their reasons in connection with the unsolicited bid of Aurora for CanniMed (the Reasons). Below, members of our Special Situations team set out some of the key lessons of the decision.

Key Takeaways

  • expect to see an increased use of hard lock-ups (that is, lock-ups in which a shareholder agrees to tender shares even if a superior bid comes along), which will provide bidders with reduced risk during the new 105-day bid period
  • well-structured hard lock-ups do not necessarily result in target shareholders being joint actors with the bidder
  • tactical shareholder rights plans or poison pills will likely have limited uses going forward
  • ultimately, regulators expect the new takeover bid regime to emphasize target shareholder choice
  • regulators will insist on strict compliance with the new takeover bid regime

Quick Background

  • Aurora Cannabis Inc. launches unsolicited bid for CanniMed Therapeutics Inc. and signs hard lock-up agreements with four target shareholders representing approximately 38% of CanniMed’s shares
  • Three days later, CanniMed announces it has entered into a plan of arrangement with Newstrike Resources Ltd.
  • CanniMed announces that its board has adopted a tactical poison pill in response to Aurora’s bid

Key Lessons

Lesson 1: Lock-ups are good for bidders and do not necessarily make shareholders joint actors

Due to the 105-day deposit period provided for in the 2016 take-over bid regime, bidders are exposed to greater risk. The response of bidders has been to attempt to secure hard lock-ups from target shareholders as early as possible. We expect this trend to continue following the Aurora/CanniMed decision. Hard, well-structured lock-up agreements will be a critical tool for bidders.

In the Reasons, the Commissions noted that while lock-up agreements or the context in which they are used can raise public interest issues, lock-ups are a “lawful and established feature” of the M&A process and are of increased importance since the adoption of the new regime. By upholding relatively restrictive lock-ups, the Reasons indicate that generally the Commissions will accept target shareholders’ ability to execute lock-ups in furtherance of their own interests.

The Reasons held that entering into hard lock-up agreements did not automatically result in Aurora and the locked-up shareholders acting jointly or in concert. The Commissions noted that Canadian securities legislation provides that an agreement or understanding to tender securities to a bid does not, in and of itself, lead to a determination of acting jointly or in concert. The legislation does not distinguish between hard and soft lock-ups.

Notably, the provision in the agreements requiring the locked-up shareholders to vote against the Newstrike transaction and for the Aurora transaction if it were reformulated into a corporate transaction (such as an arrangement) did not make Aurora and the locked-up shareholders joint actors – the Commissions found that such voting provisions were consistent with the otherwise permissible commitments to tender to a bid. In the Commissions’ view, the lock-ups were consistent with the shareholders seeking enhanced liquidity and a higher price.

Lesson 2: Despite creative defensive tactics, regulators expect shareholders to have the ultimate say

The Reasons emphasize that despite creative defensive tactics targets may employ, the uses of tactical poison pills will likely be limited under the new regime. The Reasons suggest that it will be a rare case where poison pills will be allowed to interfere with established features of the new bid regime—including by preventing creeping 5% acquisitions or hard lock-ups.

In this case, CanniMed’s pill had a number of unusual features, including changing the mandatory extension period to 10 business days rather than the 10 calendar days provided for under the bid regime, and deeming all securities subject to lock-up agreements to be beneficially owned by Aurora.

The Commissions cease traded CanniMed’s pill, as in their view, its principal function was not to give CanniMed’s board extra time for higher bids to emerge, but rather to prohibit further lock-ups being entered into and to support the Newstrike transaction in the face of Aurora’s bid, which was conditional on the Newstrike transaction being abandoned. As such, the pill interfered with legitimate and established elements of the bid regime such as lock-up agreements, which are of increased importance under the new take-over bid regime.

Lesson 3: Regulators will insist on strict compliance with the new regime

The Reasons indicate that given the “careful rebalancing” of the takeover bid regime in 2016, the Commissions will be reluctant to waive prescribed bid requirements, favouring a predictable regime instead.

Aurora argued that the policy rationale for the “alternative transaction” exception to the 105-day bid period applied in this case. As a result, the minimum deposit period for Aurora’s bid should be reduced from 105 to 35 days to coordinate the timing of the Newstrike acquisition and the Aurora bid and allow shareholders to consider both at once.

The Commissions disagreed, and stated that the Newstrike transaction was not an alternative transaction to Aurora’s bid, noting that Aurora itself had made its offer conditional on the Newstrike transaction not being completed. The Commissions noted that Aurora was free to solicit proxies against the Newstrike transaction if it so chose and could also seek to persuade shareholders to wait it out until its bid expired. The Commissions stated that abbreviating the 105-day period was not necessary in the circumstances to facilitate a choice by CanniMed shareholders between both transactions. In addition, in their view, the Newstrike acquisition did not preclude competing bids during the bid deposit period.

The Commissions also found that Aurora could avail itself of the 5% exemption to the prohibition against it purchasing target shares outside of the bid, noting that Aurora did not own any shares and that allowing a purchase of up to 5% would not put Aurora in a blocking position to preclude any superior offers.


The Aurora/CanniMed reasons provide the clearest guidance to date on the state of hard lock-ups and defensive tactics under the new regime. Overall, the message is clear: the expectation is that target shareholders should have the ultimate say. We will continue monitoring future developments.

Preparing for activism in 2018: the activist investing annual review

Activist Insight recently published the fifth annual edition of The Activist Investing Annual Review (the Review). The Review analyzes global activist investing trends over the past few years, with an emphasis on 2017, forecasts developments expected in 2018, and breaks out key statistics by jurisdiction.

The 2018 Forecast

The Review identifies four big trends expected to make their mark on 2018 activism:

  • Return to large-cap targets. With more institutional investors recognizing the benefits of an activist approach, such investors have become more and more willing to support activist campaigns. This support allows activists to challenge larger and larger companies, a trend showing no signs of slowing down in the coming year.
  • Resurgence of the proxy contest. With declining settlements and bolder defence tactics, many companies facing activist campaigns have become less willing to settle.
  • Backlash against dual class shares. In 2017, dual class share structures came under scrutiny from S&P Dow Jones, FTSE Russell, and MSCI, with backlash causing companies to rethink plans to offer non-voting shares in forthcoming IPOs.
  • Activism outside the United States. Shareholder activism is gaining traction in Europe and Asia, from shareholder rights directives adopted in the European Union to corporate governance reform in Japan. Continuing the trend from past years, global activism is expected to continue its upward trajectory.

Focus on Canada

In Canada, 2017 saw 47 targets face public demands from activist investors. This represents a decline from 2016 and 2015, in which 53 and 60 companies were publicly subjected to activist demands, respectively. Nonetheless, outside of the United States, Canada ranked second highest in number of activist targets by location of company headquarters, topped only by Australia with 53 targets in 2017. In addition, these numbers do not reflect activist activity that occurs behind the scene without public campaigning.

Breaking down the statistics by target characteristics, activism in Canada in 2017 aligns with Canadian market characteristics generally. Accordingly, approximately half of the target companies headquartered in Canada that faced activist challenges had a market cap of $250 million or less, with another 30% between a market cap of $2 billion and $250 million. Similarly, the breakdown of activism in Canada by sector reflects the two-thirds share of Canadian stock listings in the energy and financial sectors. The recent cyclical downturn in the energy sector correlates to the reduction in activist activity in Canada over the past year. However, as the cycle swings upward again, watch for increased activity in this sector.

M&A activism increased in Canada by 0.9 percentage points from 2016 to 2017, a more modest increase than observed in Europe and Asia, but contrary to the trend set by Australia and especially the United States. In 2017, M&A activists were increasingly likely to advocate for an M&A transaction, up to 65% from 56% in the year prior. Despite the lull in 2017, overall M&A activism has shot up over the last five years, with activists pushing for more comprehensive changes through deal-making, another important trend to watch for this year.

The complete Review may be obtained from Activist Insight here.

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The author would like to thank Kassandra Shortt, articling student, for her assistance in preparing this legal update.

Trends in Environmental Social Governance

Corporations are facing increasing pressure to offer more transparency and disclosure with respect to their governance practices that promote environmental and social sustainability. This year’s trends in Environment Social Governance (ESG) in the context of Canadian corporate governance indicate that more and more corporations are including ESG as part of their core mandates and that investors are looking and asking for more ESG-related disclosures in making investment decisions.

What is ESG?

ESG is a general term used in the capital markets referring to non-financial performance indicators including sustainability, ethics and corporate governance factors, which measure the sustainability and ethical impact of an investment. ESG factors focus on activities that have actual or potential impact on the environment, human health, and, more broadly, society. Empirical data shows that the integration of ESG considerations generate positive impacts on financial performance, cost of capital, and society.[1]

ESG has become increasingly important for Canadian investors and corporations

According to a study by Laurel Hill Advisory Group (Laurel Hill), an independent cross-border advisory firm, Canadian investors are increasingly aware of and interested in how ESG issues are related to a company’s strategy, risk management, and operations. Similarly, according to the CFA Institute, almost 75% of investment professionals took a company’s ESG into consideration when making an investment decision.  More specifically, a 2016 study by RR Donnelly makes the following key findings relating to investors’ views vis-à-vis ESG information:

  • 65% of Canadian institutional participants said that they often or always consider environmental and social issues, and 95% of them often or always consider governance issues for all investments.
  • ESG information is mostly used by portfolio management teams: 70% of portfolio management teams review environmental issues, 65% review social issues and 80% review governance matters for every investment.
  • Only 30% of the investors find the ESG information provided by companies sufficient to help them assess the ESG’s materiality to the company’s business. 75% of the respondents said they prefer getting ESG information from third parties.
  • Investors are interested in specific information linking ESG issues to the corporate strategy, risk management and operation.

The Laurel Hill report shows that Canadian investors want more information about ESG. However, there is a gap between the ESG information that companies are disseminating and the information that investors are interested in.

Regulators are contemplating additional disclosures

The increased interests in ESG  has drawn regulatory attention. On March 21 2017, the Canadian Securities Administrators (CSA) announced a climate change disclosure review project. The project sought to review the disclosure practices of public companies in relation to climate-related risks and financial impacts. One of the key components of the project is to review international disclosure requirements and voluntary frameworks. In doing so, the CSA Staff will “review climate-related disclosure requirements in the securities laws of certain international jurisdictions, such as Australia, the United Kingdom and the United States, as well as recommendations contained in recently proposed voluntary disclosure frameworks with respect to climate-related disclosure.”

At the provincial level, the Ontario Securities Commission (OSC) noted in its 2018 Statement of Priorities “the growing financial relevance to investors of [ESG] factors and the need for ESG disclosure by companies.” The OSC stated that it would continue to monitor developments in respect of ESG practices “to assess whether additional or new forms of disclosure are required”.

Given investors’ surging interests in ESG, coupled with regulatory initiatives to collect and review information on international ESG standards, it may be only a matter of time before further ESG disclosures are required – especially in light of the regulators’ heralded openness to further disclosure obligations.

[1] Gunnar Friede, et al., “ESG and financial performance: aggregated evidence from more than 2000 empirical studies” (2015), Journal of Sustainable Finance & Investment, Vol. 5, No. 4, 210–233.

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 The author would like to thank Saam Pousht-Mashhad, articling student, for his assistance in preparing this legal update.

Governance Oversight – Is Your Board An Active One?

In a recent interview with Christopher P. Skroupa on, Walied Soliman (Chair of Norton Rose Fulbright Canada, LLP and Co-Chair of Norton Rose Fulbright’s Canadian special situations team) weighs in on what it means to be an active director. The interview can be viewed here.

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Ignoring board gender diversity is no longer an option

Discussions around board gender diversity are picking up steam in the lead up to the 2018 proxy season. Some of the leading proxy advisory firms, namely the Institutional Shareholder Services (ISS) and Glass Lewis & Co. LLC (Glass Lewis), appear to have caught wind of the discussions – both firms added a voting policy in respect of board gender diversity to their 2018 proxy voting guidelines for Canada.

The discussions around board gender diversity are not new. In late 2014 (and as reported on this blog), the Canadian Securities Administrators (CSA) published ‘comply or explain’ rules (the CSA Rules) regarding the representation of women in director and executive officer positions that were adopted by the securities regulatory authorities in a majority of Canadian provinces and territories. This approach requires TSX-listed issuers to disclose on an annual basis:

  • the number and percentage of women on the board and in executive officer positions;
  • director term limits or other mechanisms for the renewal of the board;
  • policies relating to the identification and nomination of female directors;
  • details on how the issuer or its board considers the representation of women in the director identification and nomination process and in executive officer appointments; and
  • targets for women on the board and in executive officer positions.

Where these issuers have not adopted the aforementioned mechanisms, policies, or targets, or do not consider the representation of women, they must explain their reasons for not doing so. (We recently reported on the review of these disclosures made by certain Canadian securities regulatory authorities).

In response to the CSA Rules, the Canadian Coalition for Good Governance (CCGG) adopted its own board gender diversity policy. The CCGG finds the current CSA ‘comply or explain’ approach to be insufficient. Rather, the CCGG believes the current regulations should recommend the adoption of written board gender policies in the form of a corporate governance “best practices” guidelines.

The ISS and Glass Lewis seem to agree with the CCGG that the ‘comply or explain’ approach is insufficient. However, they differ slightly in their approach.

Beginning in 2019, the ISS will generally recommend withholding a vote for the nominating committee chair of the board of a TSX-listed issuer where (i) the issuer has not disclosed a formal written board gender diversity policy and (ii) there are no female directors on the board. The ISS further prescribes that the board gender diversity policy include a clear commitment to increase board gender diversity, avoiding boilerplate or contradictory language. Specifically, the board gender diversity policy should contain measurable goals and targets to increase board gender diversity within a reasonable period of time as well as a description of the processes used to monitor the issuer’s progress in meeting its goals and targets. Moreover, consideration will be given to the process used to consider gender diversity in executive officer positions. The ISS policy will not apply to newly publicly listed issuers within the current or prior fiscal year, issuers that have transitioned from the TSX-V within the current or prior fiscal year and issuers with four or fewer directors.

Glass Lewis, on the other hand, will, beginning in 2019, generally recommend withholding a vote for the nominating committee chair of the board of an issuer (including venture issuers) where (i) the issuer has not disclosed a formal written gender diversity policy or (ii) there are no female directors on the board. In contrast to the ISS policy, the Glass Lewis policy applies to all issuers (including venture issuers).  Furthermore, Glass Lewis, unlike the ISS, does not describe what it expects to see included in a board gender diversity policy in order to refrain from recommending a withhold vote. However, Glass Lewis recognizes that it may, upon review of an issuer’s disclosure of its diversity considerations, refrain from recommending a withhold vote in the case of a venture issuer or where it is satisfied with the issuer’s rationale for why there are no female board members. This voting policy suggests that Glass Lewis even expects venture issuers to provide some degree of disclosure in respect of its diversity considerations despite not being required to do so by the CSA Rules.

In light of the CCGG, ISS and Glass Lewis policies towards board gender diversity, issuers would be wise to evaluate whether a formal written board gender diversity policy is appropriate in advance of the 2018 proxy season. Some factors that an issuer may want to consider in this evaluation include, among others, the size of the issuer, the size of the board, the industry, the competitors of the issuer and the current governance profile of the issuer (i.e. are the already-existing mechanisms sufficient to promote gender diversity). If it determines that the adoption of a formal written board gender diversity policy is inappropriate, the issuer should carefully describe its reasons against adoption in its public disclosure record.

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

Glass Lewis’ 2018 Canada Policy Guidelines on Proxy Advice

Glass, Lewis & Co., LLC (Glass Lewis), a leading governance and proxy voting firm, has recently released its 2018 Policy Guidelines for Proxy Advice in Canada.  The following are three of its key changes from the 2017 Policy Guidelines:

Board Gender Diversity

In the new year, Glass Lewis will not make voting recommendations solely on the basis of board diversity. However, starting in 2019, Glass Lewis claims that it will generally recommend voting against the nominating committee chair of a board that has no female members, or has not adopted a formal written gender diversity policy. This recommendation may extend to other nominating committee members depending on considerations such as the size of the company, industry, governance profile of the company, and/or whether the board has provided a sufficient rationale for failing to have any female board members or adopting a formal policy.

Virtual Shareholder Meetings

Glass Lewis’ opinion is that virtual-only meetings have the potential to prevent shareholders from meaningfully communicating with the company’s management. A “hybrid meeting”, however, may create a complimentary marriage of technology and shareholder meetings, which could encourage and expand participation of shareholders who are unable to attend in person. In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company is holding a virtual-only meeting. However, starting in 2019, Glass Lewis plans to generally recommend voting against governance committee members where the board is planning (and does not provide disclosure) to hold a virtual-only meeting.

Proxy Access

In 2018, Glass Lewis will examine the regulatory landscape within Canada to assess whether existing proxy access rights are sufficient or preferable over US-style proxy access rights. Glass Lewis has observed that a number of shareholder proposals have requested that Canadian companies adopt the latter.  In situations where, in Glass Lewis’ opinion, the existing laws, policies or regulations either provide shareholders with adequate proxy access rights or would prohibit a company’s adoption of the requested provision, it will recommend that shareholders vote against such US-style proposals. In so doing, Glass Lewis will continue to monitor how similar companies in the target company’s market are responding to proxy access issues as well as any regulatory changes that may affect access rights.

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


SEC provides guidance on shareholder proposals and expands boards’ responsibilities

On November 1, 2017, the staff of the US Securities and Exchange Commission’s Division of Corporation Finance (Staff) provided important guidance to companies and shareholders on how Staff will evaluate arguments to exclude shareholder proposals from proxy materials. Among other considerations, the Staff Legal Bulletin No. 14I (CF) (the Bulletin) deals primarily with the “ordinary business” and “economic relevance” exclusions found in Rule 14a-8 of the Securities Exchange Act of 1934 (the Rule). The Bulletin reflects Staff’s continuing effort to address issues arising under the Rule, and among other things, transfers to boards of directors the responsibility for analyzing whether a proposal can be excluded on either of these bases.

The “Ordinary Business” Exception (Rule 14a-8(i)(7))

Rule 14a-8(i)(7) deals with shareholder proposals that involves certain matters fundamental to management’s ability to run a company on a day-to-day basis. Where a proposal deals with such matters, companies can exclude the proposal from proxy materials unless it focuses on sufficiently significant policy issues that transcend ordinary business. Traditionally, Staff have been responsible for making difficult judgment calls under this rule, particularly to determine when a proposal that touches ordinary business matters nonetheless focuses on a sufficiently significant policy issues. The Bulletin shifts this responsibility to boards and identifies the type of information Staff expect companies to include in no-action requests.

The “Economic Relevance” Exception (Rule 14a-8(i)(5))

Rule 14a-8(i)(5) deals with shareholder proposals that relate to operations that account for less than 5% of the company’s total assets, net earnings and gross sales. Where a proposal relates to operations that fall below this 5% threshold, companies can exclude the proposal, but only if it is not “otherwise significantly related to the company’s business”. The Bulletin notes that Staff have often limited this rule’s application by not analyzing whether or not a proposal deals with a matter that is significantly related to the company’s business. In doing so, the Bulletin makes it clear that moving forward, Staff will focus on a proposal’s significance to the company’s business even if a proposal relates to operations that fall below the 5% threshold, and even if the proposal raises significant social or ethical issues.

General Remarks

Companies trading in the U.S. should review shareholder proposals in light of Staff’s guidance on the “ordinary business” or “economic relevance” bases for excluding proposals under Rule 14a-8(i)(7) and (5) of the Securities Exchange Act of 1934. Staff Legal Bulletin No. 14I (CF) shifts the responsibility for making difficult judgments under both bases of exclusions to the board of directors, noting that boards are generally better positioned to analyze and explain why a particular proposal should be excluded. Moving forward, no-action requests made under both bases for exclusion must include a discussion of how the board analyzed a policy issue that was raised, as well as of the specific processes the board used to arrive at “well-informed and well-reasoned” conclusions.

In practice, this means that boards in the U.S., and potentially in Canada and other jurisdictions in the future, should be prepared to allocate sufficient time to review, analyze and prepare a response to shareholder proposals, all while meeting the time constraints for submitting no-action requests. While the Bulletin appears to suggest that Staff will defer to boards’ judgment when evaluating no-action requests, it remains unclear how much detail Staff expect boards to include in the disclosure of a board’s processes and analysis.

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

5 Key Developments in Canadian Corporate Governance Rules in 2017

Members of Norton Rose Fulbright’s Canadian Special Situations team have published an article on the firm’s website highlighting key developments in Canadian corporate governance rules in 2017. The article can be found here:

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Overboard, under deliver?

We recently reported that Institutional Shareholder Services (ISS) released its 2018 Americas Proxy Voting Guidelines Updates (the Policy Update), which, among other things, establishes modified guidelines for determining whether a director serving on the board of multiple public companies is “overboarded”.

Starting in 2019, ISS will recommend a withhold vote for (1) directors of TSX-listed companies who are CEOs and serve on two or more public boards and (2) any non-CEO director who serves on the board of five or more public companies.

Overboarding is a hot button topic in the realm of corporate governance. Questions arise surrounding whether a director serving on too many boards can adequately discharge his or her duties. When overstretched, the effectiveness of directors at overseeing management may be undermined. However, a counter-argument arises when considering the relative benefits to companies with boards comprised of experienced and robust directors that hold significant diversity of experience.

The Role of the Corporate Director

Directors are the leaders who approve and oversee corporate strategy and approve major capital spending decisions. They are charged with the long term stewardship of Canada’s organizations.

– Institute of Corporate Directors, “Director Lens – Fall 2017 Survey”

A 2014 Korn Ferry report found that in Canada, the average time spent by a director on his or her board responsibilities was 304 hours per year, per board. Chief among the many important roles played by directors of public companies is oversight of management. Additional duties and responsibilities include: determining executive compensation, attending functions on behalf of the company, preparing for board meetings and keeping current with industry trends, attending board meetings, training-related responsibilities, and various tasks pertaining to committee work. All things told, the responsibilities of directors can be onerous and time-consuming.

The Risks of Overboarding

In light of the broad duties and responsibilities outlined above, overboarded directors may not be able to dedicate the requisite amount of resources and energy needed to effectively serve. A recent article appearing in the Harvard Law School Forum on Corporate Governance and Financial Regulation considered directors’ professional commitments and offered three examples of how multiple competing commitments may impair risk oversight. This analysis holds true for overboarded directors:

1) Competing commitments may disincline directors from actively engaging in the corporate decision-making process, which can manifest as missed board meetings or infrequent participation;

2) External commitments may disincentivize directors from challenging management, thereby undermining the board’s oversight function; and

3) Directors spread over multiple commitments may be confronted with a disproportionately severe event requiring particular attention, thereby pushing other commitments to the back-burner.

Presumably, the negative effects of overboarding will ultimately be felt by shareholders, who may suffer as a result of directors failing to adequately discharge their responsibilities. The Policy Update may therefore have the effect of protecting shareholders by curtailing instances of directors serving on too many boards and thusly being unable to carry out their responsibilities properly.

The Case for Directors on Multiple Boards

There are certain arguments that run contrary to the change in the Policy Update. Benefits can flow to shareholders through boards stacked with directors diverse in experience. By limiting the number of boards that any given director can serve on, particularly robust directors may be gate-kept from sitting on boards where they can create value-adding opportunities. Effectively shrinking the pool of candidates, by implementing policies geared towards curtailing candidates from board seats, may be problematic in some cases (such as in cases where a board is seeking a particular skill set). Further, benefits may flow to shareholders of companies where the board is comprised of directors serving on many boards, to the extent that interconnectivity and access to various market segments manifests as sound decision-making at the corporate level.


On the one hand, companies comprised of directors serving on too many boards has the potential to detract from company performance and shareholder interests. On the other hand, having robust directors with varied experience and professional expertise underpins properly functioning companies. As is so often the case in corporate law, a balancing of interests is required to achieve optimal results. Adequate checks and balances are critical. In the difficult business of drawing a bright line, ISS has set the standard for non-CEO directors warranting a withhold vote at five. The implications and consequences of this policy remain unclear, but the impact is sure to be felt in every corner of the market.

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

Shareholder activism leads to higher rate of CEO turnover – win or lose

Shareholder activism is now a global phenomenon. Activists commonly seek to shake up the board of a target company in hopes of instilling change and increasing shareholder value. The impact on target companies can be both disruptive and enduring – often resulting in turnover among top management and in particular chief executive officers (CEOs). A recent study by Lazard found that since 2013, the average annual turnover rate of CEOs at target companies was 23 percent, compared to 12 percent at non-target companies.

It should not come as a surprise that successful activists who secure board seats may have greater influence in locating and retaining management candidates that align with their interests and objectives. A recent study by FTI Consulting of over 300 activist campaigns reveals that within a year following an activist campaign where the activist secured board seats, CEOs were three times as likely to be replaced.

Interestingly, however, CEOs were still twice as likely to be replaced within a year after an activist campaign even where activists do not secure board seats. There are of course many variables involved in considering change of management. One possible explanation is that an activist attack signals to the target company the need for change. Alternatively, the turnover could be a result of the manner in which management handled the activist attack.

All in all, CEOs and other top management alike should consider themselves warned – activist attacks require prompt and effective action to respond to the threat and, if appropriate, address the underlying issues identified by the activists. Their jobs could be on the line.

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The author would like to thank Samantha Sarkozi, articling student, for her assistance in preparing this legal update.