Fee-Shifting By-Laws in Canadian Shareholder Litigation

A fee-shifting by-law in the shareholder litigation context, “obligate[s] the plaintiff-shareholder to reimburse the corporation’s expenses (including attorneys’ fees and other costs) when the plaintiff [is] unsuccessful in litigation.”

Shareholder litigation in the United States operates under the “American Rule” which provides that each party is responsible for their own attorney’s fees. Unlike South of the border, in Canada lawyers’ fees are largely recoverable by the prevailing party. The 2008 financial crisis escalated the number of shareholder-initiated suits, especially in the United States. To address this, American corporations have attempted to avoid bearing the cost burden of unsuccessful shareholder initiated litigation. One method which proved successful for ATP Tour Inc. was a fee-shifting by-law. This by-law was unilaterally adopted by the board of directors without express shareholder consent. The purpose of the by-law was to force the shareholder-plaintiff to accept the financial risk when commencing unsuccessful litigation against the corporation.

While fee-shifting by-laws were initially upheld by the Delaware courts in ATP Tour Inc v Deutchser Tennis Bund in 2014, it did not take long for the legislature to respond. After significant controversy and the adoption of similar by-laws by 70 public companies, legislative changes expressly prohibited the use of fee-shifting by-laws.

The introduction of a balanced, as opposed to one-sided, fee-shifting by-law has the ability to deter non-meritorious claims while encouraging meritorious ones. This is much like the Canadian system in which both parties risk legal costs when claiming or defending an action. This is in contrast to the fee-shifting by-law in ATP Tour. In that case, the fee shifting by-law discouraged even claims with merit: the plaintiff-shareholders were unable to recover costs even upon success and were forced to bear the burden of legal costs even if they were partially successful. The all-out ban put in place by the legislature is on the opposite end of the spectrum. Prohibiting either party from benefitting from success in litigation does not provide an early filter for non-meritorious claims.

As mentioned above, Canada ascribes to the “loser pays” model. As a result, concerns about a “chilling effect” on meritorious claims may not have the same ground in Canada for striking down fee-shifting by-laws. However, there still may be room for fee-shifting by-laws in Canada. The attorney fees recovered are almost never on a “full indemnity basis” and generally are within the range of 50-80% (partial to substantial indemnity). This means that a fee-shifting by-law has the potential to ensure full indemnity recovery, if enforceable. That being said, unlike in the U.S., in the Canadian context, an amendment to the by-laws requires the confirmation of shareholders. Therefore, even if a corporation were to adopt a fee shifting by-law, it is unlikely that the corporation’s shareholders would confirm such.

To date, a fee shifting by-law has yet to be tested by the Canadian courts in the context of shareholder litigation.

The author would like to thank Kiri Latuskie, summer law student, for her assistance in preparing this post.

Tracking the Rise of Shareholder Activism through Withhold Campaigns in North America

By Simone Nash (Toronto) on July 16, 2018 Posted in Corporate Governance, Shareholder Activism

In a recent post about Canadian proxy contest trends, we discussed the growing concern with “The Active Passive investor” and potential issues on the horizon given a surge in the use of “withhold” campaigns. As of late, the prominence of withhold campaigns to signal shareholder discontent to boards of directors in North American markets has seen an even sharper rise.

“Withhold” campaigns

In an uncontested election of directors, management of companies solicit proxy cards or ballots that allow shareholders to either cast an affirmative vote “for” the director candidate of the board, or “withhold” their voting authority. If a shareholder chooses to “withhold authority” on a director nominee, the voting instructions are considered “no” votes, which increases the percentage of shares “withholding” and reduces the percentage of shares voting “for” the uncontested nominee. This makes it more difficult for a nominee to obtain required approval percentage to be acclaimed.

“Withhold” (or “vote no”) campaigns typically involve public solicitation of shareholders to suggest the withholding of their respective votes from some or all the board’s nominee directors. Public news releases initiating withhold campaigns range in complexity depending on the level of solicitation based on the magnitude of change desired. Beyond just signifying dissatisfaction with the board, shareholders sometimes enlist withhold campaigns to target specific directors as proxies for particular corporate governance issues.

Increasing attractiveness and popularity

A formal proxy contest provides a way to drive change, but often at a cost so great (relative to the size of an investor’s holdings) that it limits their use. Some companies restrict shareholders’ abilities to drive change by precluding participation in formal proxy contests. For these reasons, withhold campaigns have naturally become the alternative.

Passive aggressive investors use these campaigns as less disruptive ways to assert pressure on the board to reform themselves before the involvement of an activist investor – akin to a ‘friendly’ attempt to settle a grievance before starting a lawsuit. Essentially, these campaigns have become a powerful tool for catalyzing corporate change in a manner that shows there is still faith that the board will ‘do the right thing.’ withhold campaigns present a low-cost opportunity for shareholders seeking corporate change, and also create new concerns for management that may be vulnerable to shareholder action.

What to look out for

An important characteristic of withhold campaigns is that they leave the ultimate decision up to the board of directors, meaning that withhold campaigns cannot force a board to act. By the same token, the campaign’s strength is that it sends a strong message saying that there is a clear need for change on the board of directors in order to right the ship. A successful withhold campaign is likely to have affects as serious as a formal proxy contest or other shareholder action, but requires much less to be successful.

There are different ways that a corporation or a board of directors can prepare in order to optimize its response to these types of special situations. Many still choose to be more passive, which tends to involve relying on reactive proxy solicitation (essentially going to battle and fighting back), or building consensus by objectively considering the campaign’s ideas in an attempt to make the situation more cooperative.

Others may take more proactive approaches, such as regularly evaluating business lines and market regions, monitoring the company’s ownership, understanding the activists, evaluating risk factors, or even having engagement plans in place that are tailored to the shareholder base and concurrent issues that the company faces. It is becoming more common for a board of directors to increase engagement and accountability to the shareholders in an attempt to better prevent withhold campaigns.

It will be important for all stakeholders to track how this trend influences the market, and the impact it may have on how businesses prepare for shareholder activism.

The author would like to thank Daniel Lupinacci, summer law student, for his assistance in preparing this post.

“The Great White Short?” Canada Is the World’s #3 Destination for Activist Short Selling

By Trevor Zeyl and Joe Bricker on July 10, 2018 Posted in Corporate Governance, Proxy Battles, Securities, Shareholder Activism, Short selling

Recently, Activist Insight released a report on activist short selling. Activist short selling is when investors publicly bet on a stock going down in value. Among other interesting trends, the report shows that Canada ranks number 3 in the world for activist short campaigns. The data suggest that Canadian companies should be on high alert about the possibility of an activist short play.

The global number of activist short campaigns is trending downward

2015 represented a high water mark for activist short selling, with 274 campaigns globally. Since 2015, numbers have trended downward, with 263 campaigns in 2016, 186 in 2017, and 40 in Q1 2018.

The reasons for this downward trend may have to do with more careful selection of targets. We have seen a similar phenomenon on the long side. The overall number of public proxy fights is generally trending downward. However, we see activists in the Canadian market being more picky about targets on the long side, and increasingly achieving settlements based on realistic potential outcomes in a proxy fight.

Nonetheless, Canada remains a hotspot for activist short campaigns

Canada saw 9 public short campaigns in 2017, placing it behind only China (12) and the United States (138). For funds in the US looking for new targets, Canada is a particularly attractive environment. Canada is geographically close and culturally familiar. It is also relatively easier for activist short sellers to take a large short position opposite a Canadian issuer, given the smaller average market caps of Canadian companies.

Activist short sellers are doing well particularly when they target smaller companies

For campaigns against companies with market capitalizations less than USD $50 million, the average one-year campaign return in 2017 was 57.8%. For companies with market capitalizations between $50 million and $250 million, that number was 34.4%. Strikingly, for companies larger than this, one-year returns on short campaigns were negative. For instance, for campaigns against companies with market caps over $10 billion, the average one-year return was -19.1%.

Because many activist short campaigns tend to be loud and splashy, and target high-profile companies, smaller issuers may not think of themselves as potential targets. This belief can be dangerous. The greater success of short sellers against smaller targets will likely encourage them to focus on smaller targets—which Canadian companies are more likely to be by US standards.

Advice for issuers

Even one tweet from an activist short seller can quickly and significantly depress the value of a company’s shares. Regardless of their performance, Canadian issuers should be prepared for the possibility of an activist short attack, and game out possible responses long before one occurs.

The authors would like to thank Bikaramjit Sandhu, summer law student, for his assistance in preparing this post.

Tracking the Rise of Shareholder Activism in Asia

By Peter Charbonneau (Toronto) on June 19, 2018 Posted in Proxy Battles, Shareholder Activism

Shareholder activism has steadily been on the rise in Asia in the past seven years, but is it here to stay?

According to a recent report published by J.P. Morgan in May 2018, the numbers seem to support this proposition. As outlined in the report, only 10 shareholder activist campaigns took place in Asia in 2011 — that number ballooned to 106 in 2017.

Shareholders of Asian firms have historically been reluctant to engage in public activism. There are likely many reasons for this, including, according to Chelsea Naso of Law360, the prevalence of control block shareholders in the Asian corporate landscape, which makes activist campaigns more difficult.

Two reasons why shareholder activism is on the rise in Asia

An increase in Asian governmental reforms that are encouraging shareholders to take a more activist approach
An influx of global institutional investors into Asia who have shown a willingness to support shareholder activism

Asian Governmental Reforms

Governments in a few prominent Asian jurisdictions have taken steps to reform regulations and protect the interests of minority shareholders. Hong Kong Exchanges and Clearing Limited finalized new rules seeking to “restrict abusive practices and protect the interest of minority shareholders.” Likewise, South Korea’s Financial Services Commission has announced plans that aim to encourage minority shareholder participation. Finally, in Japan, Prime Minister Shinzō Abe has publically advocated for corporate governance reform, which could be a boon for prospective activist activity.

The actions of regulators and government officials throughout Asia have contributed towards a changing corporate cultural landscape where activists feel more empowered to challenge the status quo of governance structures.

Attracting Global Attention

As shareholder activism demonstrates that it may improve companies’ stock performance, global institutional and activist investors have been increasingly willing to launch and/or support activist campaigns.

Examples of prominent investors engaging in Asian activist campaigns include Elliot Management’s involvement in Korea and Third Point’s activity in Japan. Furthermore, foreign funds now make up approximately 21% of investors in India, compared to 13% in 2008.

While significant obstacles still exist, including cultural factors and development of the legal framework, shareholder activism is beginning to look like it may have some staying power in certain Asian jurisdictions. The recent rise is evident in the numbers: Asian activist activity now makes up 31% of all activist campaigns outside of the U.S., a dramatic increase compared to 2011, when it comprised only of 12%.

If these trends persist, expect those numbers to continue to rise.

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

Changes coming to Canadian Business Corporations Act (CBCA)

By Denise Gan (Toronto) on June 15, 2018 Posted in Compliance, Corporate Governance, Shareholder Activism

Bill C-25 received Royal Assent on May 1, 2018. The bill will amend the CBCA by: reforming certain aspects of director elections; creating requirements for public companies to disclose officer and director diversity representation; and introducing the new Notice-and-Access Regime.

While some of the CBCA amendments have come into force, many of the amendments – including those described below – will come into force on a future date. As well, certain amendments must await changes to relevant regulations. The Federal Government has published the proposed regulatory amendments and is currently accepting comments from the public. It is projected that it will take 18-24 months to develop the new regulations. In M&A deals where the target is incorporated under the CBCA, the acquirer should be aware of the implications that Bill C-25 will have on federally incorporated companies.

Changes to Director Election Process:

For public companies, the new CBCA rules will allow newly elected directors to hold office only until the next annual meeting. Prior to the amendments, directors could hold office for three years.
The voting procedure will change for certain corporations (public corporations based on the proposed regulations). There will be a separate vote for each candidate nominated for a director position, instead of a single slate vote being held for all nominated candidates.
The proxy form in the regulations will be amended to allow shareholders to cast votes either “for” or “against” a nominee. The current form only allows a vote “for” or a “withholding” of a vote when during majority voting.
When there is only one nominee per board position for a public company, the nominee will only be elected if they win the majority of votes being cast for or against them. These changes are meant to provide shareholders with greater influence in board elections. Under the current rules, a plurality system is used for uncontested elections for public companies, where shareholders can only vote “for” or “withhold” votes. The plurality voting method allows a nominee to win a board seat even if they only receive one vote for their election, with all other shareholders withholding their votes. While the TSX tried to solve this issue by requiring directors who receive a majority of withheld votes to tender their resignation, the board can reject the resignation and allow the elected director to continue to sit on the board. The new CBCA rules would apply to all public companies, not just those traded on the TSX, and they would prevent a director who fails to gain a majority of votes from serving on a board, subject to limited exceptions. Furthermore, only in particular circumstances will a single nominee be able to be appointed as a director after failing receive a majority of the votes in an election. Under the proposed regulations these circumstances include: the need to fulfill either the Canadian residency requirement or the requirement that two of the directors are not employees or officers of the company.

Diversity Disclosure Requirements:

The CBCA amendments will require public companies to provide information relating to diversity policies at every annual meeting. The information to be disclosed is the same information required under Items 10 to 15 of Form 58-101F1 (Disclosure of Corporate Governance Practices) under provincial securities rules. The difference is that the disclosure requirements will apply to the broader “members of designated groups”, which includes women, Aboriginal peoples, persons with disabilities and visible minorities. Companies that fail to adopt written policies regarding representation of members of designated groups on their boards will be required to explain to shareholders why they chose not to adopt such policies. Advocates of this change to the CBCA hope that this will increase diversity on boards of public companies. However, securities rules that required such disclosure for representation of women on boards failed to produce significant gains in gender diversity on boards in the last few years. It remains to be seen whether the CBCA changes will be more successful in creating diversity on boards of public companies.

The new Notice-and-Access Regime:

The amendments to the CBCA and the proposed regulations will allow public companies to rely more heavily on electronic means for communicating proxy-related materials to its shareholders. Shareholders will be able to access proxy materials over the internet. The Federal Government has communicated that, “until the required regulations are developed, Corporations Canada is of the view that the notice-and-access regime provides shareholders with sufficient disclosure to support applications for exemptions” from having to circulate paper copies of proxy materials and annual financial statements to shareholders.

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

The Gender Question: BC Securities Commission asks for comment on disclosure requirements with respect to board gender diversity

By Geoff Mens on June 14, 2018 Posted in Compliance, Corporate Governance, Shareholder Activism

In late 2014, the Canadian Securities Administrators (CSA) published “comply or explain” rules regarding female representation in director and executive officer positions. The requirements were codified in National Instrument 58-101 (the Disclosure Requirements) and created a positive duty for issuers in participating jurisdictions to disclose the details of female representation, including issuers’ targets, policies, and mechanisms to address female representation in director and executive officer roles. Where issuers do not adopt such mechanisms or consider female representation, they are required to explain their reasons for not doing so. The Disclosure Requirements were adopted in all CSA jurisdictions except for BC and Prince Edward Island on December 31, 2014 (with the exception of Alberta, which did not adopt until December 31, 2016) (the Participating Jurisdictions).

Following the adoption of the Disclosure Requirements, the CSA conducted a review of the progress of female representation for women on boards and in executive officer positions. We reported on this review (CSA Staff Notice 58-309) in late 2017.

In January 2018, we posted that we expected further discussions surrounding board gender diversity in the lead up to the 2018 proxy season, with leading proxy advisory firms such as the Institutional Shareholder Services and Glass Lewis & Co. LCC adding a voting policy with respect to board gender diversity to their 2018 proxy voting guidelines for Canada.

As 2018 progresses, it is clear that discussions about gender diversity remain an ongoing area of focus for regulators. On February 26, 2018, the British Columbia Securities Commission (BCSC) published a notice and request for comments seeking input on the gender diversity Disclosure Requirements in NI 58-101 (the Consultation). Although BC has not adopted the Disclosure Requirements, BC-based TSX-listed and other non-venture issuers must comply with the Disclosure Requirements regardless, as they report in at least one of the Participating Jurisdictions.

The Consultation, which is running in tandem with consultations on the same issue by the Participating Jurisdictions, is meant to assist the BCSC in understanding the views of BC market participants as well as the benefits and challenges of diversity-related requirements. Comments are meant to discuss the Disclosure Requirements generally, and whether Canadian securities regulators should consider any further regulatory measures or actions in this area.

The Consultation is asking for some more specific inputs as well, such as:

the experience so far in providing information mandated by the disclosure requirements;
whether the disclosure requirements provide investors with the necessary information to inform their investment and voting decisions and how that information is incorporated;
whether corporate governance guidelines regarding gender diversity-related governance policies should be implemented and if existing guidelines are sufficient; and
whether issuers should be required to disclose if they have policies relating to diversity other than gender.

Based on the specific questions asked by the BCSC, it is clear that the Commission to be turning its mind to how the disclosure process can be improved and whether the tools already in existence, such as governance policies and prescribed format, are satisfactory.

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

TSX Adds New Website Disclosure Requirements

By Danny Urquhart on June 13, 2018 Posted in Compliance, Corporate Finance, Corporate Governance

In October 2017, the TSX published updates under section 473 of the TSX Company Manual placing additional disclosure obligation requirements on non-exempted TSX-listed issuers.

These updates became effective on April 1, 2018.

The TSX’s updates mandate that each TSX-listed issuer (other than Non-Corporate Issuers, Eligible Interlisted Issuers and Eligible International Interlisted Issuers (as such terms are defined in the TSX Company Manual)) will be required to maintain a publicly accessible website. These issuers are also required to post constating documents (i.e. articles of incorporation or amalgamation and by-laws) as well as the following documents, if adopted:

any majority voting policy;
any advance notice policy;
descriptions for the positions of chairman of the board and lead director (the previously proposed requirement to post job descriptions of key officers has been removed);
any board mandate; and
any board committee charters.

The webpages where documents are posted must be easily accessible from the issuer’s home page. If a document required to be posted is contained within a larger document, the requirements will be satisfied by the posting of the larger document.

These updates to the TSX Company Manual are intended to provide participants in the Canadian capital markets with ready access to key security holder documents. While reporting issuers are required to file certain material documents with Canadian securities regulators, which are publicly available on SEDAR, this new policy is intended to enhance the accessibility of such documents to the investing public. Further, this updated policy requires affected issuers to post documents that may otherwise not have been public or readily viewable.

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

Corporate Governance in the Cannabis Sector

By Simone Nash (Toronto) on June 12, 2018 Posted in Compliance, Corporate Governance

Since the introduction of Bill C-45 to legalize the production, distribution and sale of cannabis for recreational use, the cannabis sector (the Sector) has been thriving. Despite many unknowns and uncertainties surrounding the Sector, investors appear unfazed as share prices continue to surge.

Some key features of the Sector

Even though Bill C-45 has not yet passed and has been the subject of some controversy, investor reticence appears to be at a minimum. However, mirroring the volatility of the cannabis market itself, the nature of these investors has changed. Whereas in the nascent stages of the Sector investors could generally be categorized as retail, advisory firm Kingsdale Advisors (Kingsdale) observes that investors of larger cannabis companies are becoming increasingly institutional. Kingsdale attributes this shift to forthcoming legislation, companies’ need for capital and their increased market cap and indexing. As investors increasingly change from retail to institutional, they may place greater scrutiny on the companies for their governance practices and proxy advisory firms like Institutional Shareholder Services and Glass Lewis may begin to influence the operations and trajectories of these affected companies. Kingsdale also notes that the pool of potential acquirers of cannabis companies is ever-expanding.

Significance and relevance of corporate governance

Kingsdale advises that as the nature of the Sector changes, as described above, the significance of sound corporate governance practices rises. In particular, Kingsdale warns directors of cannabis companies to be on alert for hostile bidders and activist shareholders who may launch campaigns that could detrimentally transform the companies. Similarly recognizing the significance of corporate governance, Ernst & Young, in its report entitled “How do you define your future in an undefined market? Insights and perspectives from Canada’s cannabis industry leaders”, suggests that Canadian licensed cannabis producers “will need to quickly organize talent and apply the formality, rigour and a lens for governance that established organizations do”.

As the passing of Bill C-45 looms near, it may prove to be imperative for cannabis companies to monitor how the market value of the Sector reacts, how the nature of the investors changes, as well as any other consequences of the legislation in order to ensure their companies’ success.

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

Best Practices for Board Oversight and Disclosure of Environmental and Social Issues

By Mark Bissegger (Toronto) on June 11, 2018 Posted in Compliance, Corporate Governance, Shareholder Activism

In a recent post, we discussed investors’ growing interest in environmental and social (E&S) governance. As a recent report published by the Canadian Coalition for Good Governance (CCGG) demonstrates, public company boards are no less attentive to growing shareholder interest in E&S issues. The Directors’ E&S Guidebook (Guidebook), which is the product of consultations with industry leaders in the management of E&S factors, provides practical insights and recommendations for effective board oversight and disclosure of E&S matters.

Companies have good cause to respond to investor interest in E&S matters. For some, past incidents provided the impetus for the implementation of effective management structures. However, the report emphasises that the value of E&S structures is not limited to a preventative function; E&S structures have the potential to significantly increase shareholder value. In fact, the Guidebook found that many companies credited E&S policies with talent attraction and retention. CCGG also predicts that this association will persist because Millennials are more likely to monitor and demand commitment to E&S matters from the companies they work for and invest in.

The Guidebook also suggests best practices for the management of E&S issues. It outlines a number of E&S governance recommendations under eight governance topics. For example, under the topic of board practices, the Guidebook recommends that boards ensure that E&S priorities are a regular discussion item in meetings and design an escalation mechanism so that E&S issues may be brought to the attention of the board in a timely manner.

The Guidebook also provides four key insights from companies with existing E&S structures. First, a company’s unique experiences and drivers will determine the E&S factors that are high priority. Second, a robust approach to managing E&S risks is developed incrementally. Companies should view their approach to E&S matters as a central element of their corporate culture, strategy and operations. Third, the tone set by management is crucial to institutionalizing new behaviours motivated by E&S factors. The board must communicate its commitment to E&S issues and elevate E&S management to a long-term corporate priority. Finally, a company should be transparent about how its E&S approach creates value for its stakeholders. This will create trust and goodwill.

With these recommendations and insights in hand, companies will have a strong starting point for the integration of E&S governance into core business practices and priorities. The full report can be found here.

The author would like to thank Samantha Black, summer law student, for her assistance in preparing this legal update.

Activist Shareholders Trading on the Blockchain: Is the Prized Secrecy Compromised?

By Hugo Margoc (Toronto) on May 14, 2018 Posted in Corporate Governance, Securities, Shareholder Activism

Background: Registered Shareholders and Beneficial Shareholders

While a registered shareholder holds its shares directly with a company and can be contacted through its transfer agent, a beneficial shareholder does not have the shares registered in its name. Instead, a securities depository is the registered shareholder. There are two types of beneficial shareholders, a Non-Objecting Beneficial Owner (NOBO) and an Objecting Beneficial Owner (OBO). A NOBO has authorized a financial intermediary to disclose its identity and share position. An OBO has taken affirmative steps to object to such disclosure. Therefore, while a NOBO can be contacted directly, an OBO can only be contacted through the intermediary. Activist shareholders are generally OBOs until they are required to disclose their identity and share positions under securities regulations. We briefly explore the impact of blockchain technology on this secrecy, which is fundamental to the strategy of activist shareholders.

Increased Adoption of Blockchains for Securities Transactions

A blockchain is an alternative to classical financial ledgers by providing a new way to create, exchange, and track information pertaining to the ownership of financial assets. Transactions are automatically recorded publicly and in real time. Major stock exchanges and leading financial institutions are rapidly exploring and adopting the use of blockchains for securities issued by corporations in order to ensure more accurate, efficient, and economical recording of share ownership.

After two years of testing with a blockchain technology provider, the Australian Securities Exchange (ASX) announced in December 2017 that they be the world’s first securities exchange to use blockchain technology in corporate finance. However, unlike the public blockchain, the ASX would use a “permissioned” blockchain where participants are known, must obtain permission to have access, and must comply with continuous obligations enforced by regulators. Even more recently, in February 2018, the Canadian Securities Exchange (CSE) unveiled that they would be the first recognised exchange in Canada to introduce a fully developed blockchain platform for trading, clearing, and settling tokenised securities.

Digital Wallets and Identification

The blockchain ledger of share ownership often conceals the transacting parties’ identities because assets are held in anonymous “digital wallets” bearing complex serial codes. However, on the blockchain ledger, ascertaining the identity of a shareholder may often require little effort. For instance, if an officer of a corporation announces their intention to subscribe to a certain quantity of shares, this would immediately be recorded on the blockchain ledger, thereby inferentially divulging the officer’s ownership of the corresponding digital wallet.

Increased Risk of Identifying Activist Shareholders through Advances in Data Mining

If the distinction between OBOs and NOBOs persists in the new era of blockchain trading platforms, secrecy may not appear to be lost for activist shareholders. However, blockchain enables traders to exchange shares in a more rapid and cost-effective manner, resulting in immediacy of information and increased transparency. With significant advances in data mining and machine learning, the market could identify activist shareholders as the buyers of shares through pattern recognition, as well as de-anonymization and re-identification strategies offered by specialist research firms. This parallels current de-coding methods, such as analyzing patterns in the sequence, quantity, and timing of trades, used by market participants to infer the identity of the shareholder.

While fund managers and individual investors stand to benefit from this increased information, activist shareholders, who value and depend on secrecy when building hostile positions, are less likely to be as welcoming. Blockchains for securities transactions could compel activists, who would prefer to remain undisclosed, to adopt new strategies to maintain their secrecy, such as using many digital wallets, splitting large share acquisitions into smaller ones, or treating digital wallets as “disposable” or single-use.

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