In the first quarter of 2023, 16 board seats were secured by activist investors at Canadian companies, the highest number Insightia has recorded for the period since records began in 2014.

Of the board seats won, the majority came as part of a settlement, with nine in the first quarter, the highest number since 2016. The trend is largely due to companies opting to avoid expensive proxy fights amid the current economic uncertainty, according to leading proxy solicitors.

Alongside the notable rise in settlements, Canada has experienced a resurgence in activism overall in 2023, with such activity at its highest level since 2019, with 22 companies targeted in the first quarter, up 29% from 2022, according to Insightia’s Activism module.

“I think there’s no question that the ongoing market volatility and economic uncertainty is a contributor,” Jennifer Longhurst, partner in McCarthy Tétrault’s Business Law Group and a co-head of the firm’s Critical Situations & Shareholder Activism group, told Insightia in an interview. “We often see heightened levels of activity in such times, and I think the current economic and market situation is no different.”

Successful campaigns

One of the most divisive campaigns to kick off Canada’s proxy season involved Ritchie Bros. Auctioneers which in January appointed managing member of Starboard Value Jeffrey Smith to its board in exchange for a $500-million strategic investment from the activist hedge fund as the equipment marketplace moved to sweeten its bid to acquire IAA. The merger was vehemently opposed by activist Luxor Capital among others on both sides, but eventually crossed the line after securing the approval of shareholders on March 21.

At lithium miner Snow Lake Resources, a group of concerned shareholders successfully managed to gain board seats for their six nominated candidates, which saw three incumbents replaced.

Other notable campaigns included real estate investment trust (REIT) First Capital, where Ewing Morris, together with Vision Capital, had one board member installed, and fellow REIT Slate Office which saw two G2S2 Capital directors appointed, both as part of settlements.

Dexter John, CEO of Morrow Sodali Canada, told Insightia that the “REIT space is the hottest space right now for change and for activism.”

“A lot of industries are struggling and particularly REITs,” said John, noting that this has been accelerated by current depressed markets.

“There’s been a lot of activity in the REIT space, particularly the commercial REIT space,” Longhurst corroborated.

“The economic climate has left them being particularly hard-hit post pandemic. I think there’s been a lot of volatility in their market price, making them vulnerable, but I think we’ve also seen not only in Canada, but elsewhere, a lot of different activism around the management of REITs.”

Longhurst said that there has been agitation for REITs to either internalize or externalize management to unrelated parties and suspects that it will continue to be a sector that attracts activism.

Rule change

In August, changes were made to director elections by Canadian regulators which came into effect this year.

The amendments require separate votes to be held for the election of each candidate; proxy forms will need to provide the option for shareholders to vote “for” or “against” each nominee in uncontested elections and for uncontested elections a majority voting standard must be used, such that each nominee must receive more “for” votes than “against” in order to be elected. If a director does not get a majority of “for” votes, the candidate is deemed not to be elected as a matter of law.

With the ruling only recently coming into effect, and with a trend for proxy fights leading to settlements, John told Insightia it has been difficult to estimate the rule’s impact so far.

However, Longhurst argues it has already become an effective tool, especially for occasional or smaller activists.

“It’s a lower barrier to entry to do an ‘against’ campaign. You don’t have to find your alternative slate; you don’t have to worry about complying with advance notice bylaws. And sometimes you don’t have to worry about the broad range of solicitation rules and requirements that would go around a normal proxy campaign.”

With fewer hurdles for activists to overcome, Longhurst said that directors are acutely concerned about the reputational damage of being part of a failed board election, making the threat of a campaign a “very effective tool for securing leverage, and sometimes leading to negotiations, resulting in settlements.”