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Proxy Contests In Canada

What investors need to know

In March 2016, Smoothwater Capital Corporation announced its intention to nominate three new directors for election at the 2016 annual general meeting of Alberta Oilsands Inc., an oil and gas producer based in Calgary, Alberta and listed on the TSX Venture Exchange. In addition, Smoothwater used the court process to successfully challenge AOS’ proposed merger with another Calgary-based oil and gas producer when the deal was structured in a way that would significantly dilute existing AOS shareholders without giving them a vote on the transaction. The Alberta court required that no transaction would be approved unless and until AOS shareholders have a say on the transaction, which we expect will be to follow Smoothwater’s lead in voting it down.

This is just one recent example of a long-standing trend of activist investor involvement in Canadian companies; a trend that shows no signs of abating anytime soon. From Pershing Square’s high profile success in reconstituting the board of Canadian Pacific Railway to numerous other less prominent examples, many activists have shown a real enthusiasm for investment opportunities in Canada.

While the investment thesis for taking a position in a Canadian company will generally be no different than it would be in the US or any other jurisdiction, the legal framework that governs activist initiatives in Canada is different in a number of important ways. Some of these differences favour the investor and some of them favour the company, but it is important in any event for investors who are considering engaging in proxy contests or other activist strategies involving Canadian companies, to understand the differences clearly and to tailor their strategies accordingly. This article outlines some of the most important legal issues relevant to shareholder activism in Canada.

Building a position – disclosure, joint actors and take-over bids

Disclosure

Canada’s “early warning” disclosure regime requires public disclosure of significant ownership positions in Canadian public companies and is similar to the 13D rules with two important differences:

• the Canadian disclosure threshold is 10%; and

• early warning disclosure (a press release followed by a securities filing) is required immediately upon crossing the disclosure threshold and the investor may not acquire any additional shares for one business day after filing its early warning report.

While the higher disclosure threshold in Canada can be a significant advantage for activist investors, its benefits are mitigated in a couple of ways. First, because Canadian public companies are, on average, significantly smaller than US public companies, the aggregate amount of capital that can be invested before disclosure is required will also often be significantly lower. Second, the requirement for immediate early warning disclosure combined with the one business day trading moratorium precludes the common US tactic of using the 10-day period between tripping the disclosure threshold and filing a 13D report to significantly increase the investor’s position.

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