Blame Canada: How the Country’s Rules Make it Easier for Activists to Thrive

November 21, 2012   Stephen Taub

Barry Rosenstein’s Jana Partners is the latest U.S. hedge fund to battle a company based in Canada, which is becoming increasingly popular turf with U.S.-based activists.

Barry Rosenstein, who generally likes to position himself as a friendly activist, has told Canadian fertilizer company Agrium that he plans to launch a proxy fight. The founder of hedge fund Jana Partners has proposed five director candidates — including himself — for the board of directors of the company.

How likely is he to succeed taking his activist show to Canada? The odds may well be in his favor. Experts say he — and other shareholder activists looking to do battle with corporate management teams — has a better chance taking on a company north of the border than in the United States, thanks to several differences in Canadian rules and regulations that make it easier to take on companies there than in the U.S.

"The consensus is that it is easier for activists to succeed against Canadian companies," says Patricia Olasker, a senior partner at the Toronto law firm Davies Ward Phillips & Vineberg, who represented Pershing Square Capital Management in connection with its successful proxy fight against Canadian Pacific Railway.

A couple of recent examples bear this out, at least anecdotally. Back in May all seven of Pershing Square’s nominees were elected to Canadian Pacific’s board several days after the chief executive resigned and five other directors, including the chairman, said they would not seek re-election.

And although the U.S. hedge fund Mason Capital Management has suffered some setbacks in its battle with Canadian wireless telecommunications company Telus, it did win a victory last month in the British Columbia Court of Appeals. The court overturned a provincial Supreme Court ruling that prevented Mason from calling its own shareholder meeting.

Olasker believes the regulatory environment tips the playing field toward these activists. For example, investors in Canada can also act in a stealthier way than they can in the U.S. For one thing, they are not required to announce an ownership stake until they acquire at least 10 percent of the shares, compared with 5 percent in the U.S. And although they are required to make this announcement immediately or within one day, depending upon the situation (compared with 10 days in the U.S.), there is an exception.

If the shareholder is eligible to use what is called the Alternative Monthly Reporting System, it can file the report within 10 days of the end of the month in which the 10 percent threshold is crossed, Olasker explains. You just need to be what is called an eligible institutional investor. And who can qualify for this status? Mutual funds, pension funds and, yes, hedge funds that are managed by a registered investment advisor.

Another stealthy rule allows investors to nominate directors without providing advance notice under certain circumstances. Unlike in the U.S., where dissidents must send out their own separate proxy, which could become expensive, dissidents in Canada can avoid sending a proxy circular to shareholders if they solicit no more than 15 investors.

"In some instances in the past, dissidents have quietly conducted limited solicitations of proxies from a smaller number of large shareholders and ambushed management at an annual meeting by nominating their own alternative slate of directors from the floor without any prior warning," says Olasker.

And another provision makes it easier for a shareholder to swoop in at the last minute and influence an annual meeting. It seems in several provinces of Canada, anyone who purchases shares after the record date can vote at the meeting under certain circumstances.

Also, shareholders with just 5 percent of the voting shares can call a special shareholder meeting. This is what Mason was finally able to do. "This is a very effective tool," says Olasker, adding that it is used often.

Canada also has a version of proxy access. Under its rules, any shareholder holding at least 1 percent of the outstanding voting shares — and has held them for at least six months prior to the shareholder submitting the proposal — or whose fair market value is at least $2,000 can propose their own director nominees.

And unlike in the U.S., it is rare to see a classified board in Canada, whereby directors serve multi-year terms and only a handful can be elected in any given year, making it difficult to take control of a board in a single year. This is because in Canada, shareholders can by simple majority vote to remove one or more directors from office and elect their replacements.

Olasker also thinks short slate proposals — which historically have not been popular — may become more prevalent in light of Pershing Square’s success at Canadian Pacific. This involved putting up candidates for several board positions rather than trying to replace the entire slate.

Rosenstein did not respond to requests for comment on the Agrium matter. But clearly his move on the company is part of a larger trend toward activism in general. According to Kingsdale Shareholder Services, over the past 10 years, the number of proxy contests has risen from five in 2003 to 21 in 2011, with two extreme spikes in the number of contests in 2008 and 2009. So far this year there have been 32.

What’s more, the success rate for dissidents has increased, Olasker points out. She says the biggest reason is that the wider shareholder community is becoming more receptive to the efforts of shareholder activists, in part because of an evolution away from the so-called corporate raider tactics, made popular in the 1980s and revived in the last decade, in favor of gentler tactics.

In any case, Olasker is bracing for more U.S. activism in Canada. "We are all getting more inquiries from U.S. hedge funds interested in Canadian situations," she says.

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