Q2 | Torys QuarterlySpring 2024

Rising activism and board readiness

During the 2023 proxy season, investors set a new global record for shareholder activism, with no fewer than 69 shareholder activist campaigns taking place in Canada alone—double the number of campaigns in 2022. Facilitated by Canada being a relatively “activist-friendly” jurisdiction, this activist surge is characterized by the following trends.

 
A shift in approach for institutional investors

Though boards and management have historically often been able to rely on institutional investors for support against activists, recent trends indicate that such dynamics are now less certain. Institutional investors are increasingly developing their own proxy voting policies and standards for holding boards to account. A trend driven in part by the preferences of their underlying investors and stakeholders, institutional investors and other global fund managers are showing a growing propensity to support activist shareholder campaigns and are addressing long-established board practices with a greater degree of scrutiny.

Say-on-pay and director scrutiny continue to rise

As scrutiny continues to intensify around executive compensation, so does opposition to say-on-pay proposals, with average investor support for say-on-pay sinking to its lowest level since 20191. With the pandemic years firmly in the rearview, institutional investors are less likely to vote in favour of “stay the course” leadership, developing their own in-house proxy voting policies that seek to hold individual directors accountable for performance shortfalls. As broader economic headwinds create corporate performance challenges and market volatility, we expect this trend to continue as investors look to alternative paths towards robust returns.

An ongoing focus on ESG

Shareholders continue to hold Canadian corporations to account over their environmental and social policies, with ESG considerations playing an increasingly notable role in guiding investment decisions and strategy. This growing pressure has been applied predominantly by institutional investors with internal mandates to advance ESG policies and commitments, with 85% of investors in a 2022 survey indicating that their policies include at least some ESG initiatives.

It’s worth noting that notwithstanding increased pressure from activists, U.S. companies are experiencing a waning of support for environmental and social proposals. So-called “anti-ESG” campaigns centre on concerns raised by the political right that ESG considerations undermine the fiduciary duties of corporate boards and investment managers.

A number of different investor groups, including pension funds, private equity firms and family offices, are increasingly engaging in activist strategies as a way to protect their investments and influence corporate decision-making.
The investor profile of activists is broadening

The landscape for activist investors is diversifying to include a broader range of activists beyond traditional firms such as hedge funds. A number of different investor groups, including pension funds, private equity firms and family offices, are increasingly engaging in activist strategies as a way to protect their investments and influence corporate decision-making. Activism from these non-traditional activist groups may come as a surprise to target companies, highlighting the importance of ongoing engagement with investors and the investment community to allow for intelligence gathering on investor concerns, market sentiment and emerging issues. 

Increased activism applies to both transactions and board votes

Transaction-related activism remains a dominant theme in 2024. A common activist tactic involves acquiring a share position followed by exerting pressure on a target board to initiate a sale of the company or a spin-off with the goal of boosting the share price. However, activists are also more frequently challenging live transactions, seeking either to block them entirely or in an effort to force improved deal terms from the buyer. It is not surprising given that M&A transactions are typically driven by key corporate strategy (over which significant disagreements can arise), and these events often focus attention on (and offer a leverage opportunity over) a company from investors and activists alike. More recently we have seen some activists pursuing M&A themselves, in order to more directly take control of the corporate agenda and benefit from their value-creation strategies. Transaction parties should incorporate activism preparedness in their overall deal analysis and planning.

How boards can be prepared

Boards can best position themselves to respond to expected or unexpected activist approaches through robust, strategic preparation.

Practical advance planning steps include:

  • Implementing a market watch to gauge changes in shareholdings, share price, volume, and market commentary, and providing regular management and board updates.
  • Regularly discussing and refining the company’s strategic direction and the manner in which it is articulated to the market and shareholders.
  • Anticipating and considering a robust response to likely activist themes, based on market developments and assessments of the company’s own potential vulnerabilities.
  • Establishing a well-defined response team (including key executives, outside counsel, investor relations, financial advisors and proxy solicitation advisors) that can be ready to develop a detailed response plan.
  • Developing a detailed communications strategy designed to funnel all communications to a designated spokesperson, along with a plan to communicate with key stakeholders.
  • Maintaining a dialogue with investors and the investment community to allow for intelligence gathering on investor concerns, market sentiment and emerging issues.

For more on steps public companies can take to prepare for an activist approach, read Readiness for unsolicited M&A and activism: key considerations for public companies.

Conclusion

While it remains to be seen how these trends will evolve through 2024, in our experience, shareholder activism is driven by concerns that are often based on foreseeable grievances and perceptions of the company’s best interests. Ultimately, managing activist advances begins with effective advance preparation and a proactive approach that includes a rigorous assessment of company performance, management compensation, strategic direction and ESG policies—all to ensure that your organization is positioned to deliver value to all shareholders.


  1. “2023 Proxy Season Review: Change is Here,” Kingsdale Advisors.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.
 

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