Shareholder Activism during COVID-19 Series

---

This article was originally published by The Lawyer’s Daily www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

Michael Piaseczney and I wrote a two-part series on shareholder activism during COVID-19. Published on May 25, 2022 and May 30, 2022.  

Michael and I would like to thank Professor P.M. Vasudevfor his thoughtful mentorship and feedback on this series of articles.

COVID-19 instantly impacted world economies, governments and global citizens alike. In the corporate world of business, shareholder activists were hit with a major bump in the road in March 2020. In such an unprecedented time, these activists sought to balance the competing forces of business stability with progressive corporate social responsibility ideals.

Prior to COVID-19, however, it was widely observable that more Canadian shareholder activists advocated for gender diversity and environmental, social, governance (ESG) concerns than ever before. After approximately two years since COVID-19 first impacted the world, this article exploresCOVID-19’s preliminary effects on shareholder activism (SHA), in particular the continuance (or non-continuance) of good corporate governance practices and ESG ideals. With two years of observable data, we argue that good corporate governance and ESG advocacy have remained surprisingly prevalent despite the substantial economic challenges placed on many corporations.

Current features of shareholder activism

Shareholder activism is not a novel trend. In Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, Jeff Gramm found that the Dutch East India Company saw early signs of shareholder activity over400 years ago. In 1932, Adolf Berle Gardiner Means’s seminal work (The Modern Corporation and Private Property) brought shareholder activism into academic dialogue surrounding modern corporations. Today, any public corporation may be subject to shareholder activism efforts. SHA’s definition is just as important as its history to understand its breadth. Shareholder activism is definable as dissatisfied investors attempting to change the corporation’s management or operation without acquiring a majority of shares (see Hugo Margoc, Shareholder Activism in Canada: A Deliberate Policy Choice at p. 292). SHA can be better appreciated by understanding the tactics, or techniques, such activists employ — the most common techniques being “exit” or “voice” strategies. An investor employs an “exit” strategy by selling their shares while a “voice” centred investor can either do nothing or advocate for changes to the corporation. Often, larger investors are more likely to elect to voice their concerns because they can better absorb the costs. Different shareholder activists have been dominant actors with institutional investors having ongoing roles. Today, hedge funds are the most common shareholder activists. All shareholder activists believe that the target corporation’s performance will improve through their efforts to change management’s (agents) leadership or activities. Most shareholder activists are focused on increasing the corporation’s share price, often for short-term gains. The empirical evidence suggests that SHAs have mixed results but shown neutral to positive effects. A corporation’s directors and officers also possess defensive tactics to blunt shareholder activists. These SHA battles do not arrive in court often, although these exceptions often show deference to the different shareholder activists (Northern Minerals Investment Corp v. Mundoro, 2012 BCSC 1090 at paras. 36-37; Maudore MineralsLtd v. Harbour Foundation, 2012 ONSC 4255 at para. 108).

Shareholder activists have a toolkit of statutory mechanisms in different provincial and federal corporation law legislation such as the Canada Business Corporations Act (RSC 1985, c C-44, CBCA). First, s. 122 outlines the fiduciary duty of directors and officers owed to the corporation. Second, s.137(1) allows a registered shareholder or someone with a “beneficial owner of shares” to vote at an annual shareholders meeting. Additionally, SHAs can attempt to nominate directors and officers through the dissident proxy process or requisition a meeting to nominate a director if they have five per cent of the corporation’s shares (s. 143, 150). At this meeting they can also submit a proposal and outline the shareholder’s eligibility requirements (s. 137(1.1)).

Shareholder activism trends before COVID-19

SHA’s existing literature has identified some trends. For example, there has been much work on the empirical implications of activist hedge fund activism. Lisa Fairfax identified the corporate governance landscape as having shifted away from shareholder apathy towards activism with all actors —shareholders, officers and directors — acknowledging how SHA is an effective element now (From Apathy to Activism: The Emergence, Impact, and Future of Shareholder Activism as the New Corporate Governance Norm (2019) at p. 1314, 1345).

Canadian SHA efforts combined with legislative efforts have led to an increase in gender diversity onboards. In Canada, federal regulations and provincial securities laws include stringent disclosure requirements surrounding gender representation on boards, notably Alberta, Ontario, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Quebec, Saskatchewan and Yukon. These SHA efforts emphasize gender representation disclosure compared to other approaches (e.g., a quota system).

SHA today has seen an increase in the amount of ESG causes among institutional investors. Climate change and diversity inclusion efforts are pressing ESG issues. Fairfax highlights how corporate attitudes have shifted away from solely maximizing profits, with institutional investors having other concerns compared to or even ahead of profit (Social Activism through Shareholder Activism at 1139,1142). Comparatively, in Canada, a corporation’s directors and officers can navigate these causes because they must act in the best interests of the corporation and not solely for shareholder maximization (BCE Inc v. 1976 Debentureholders, 2008 SCC 69 at paras. 37-38).

Shareholder activism (SHA) saw a general decrease in the 2020 proxy season compared to 2019 — but SHA efforts were still active during COVID-19. The pandemic’s initial market impact resulted in a notable decline but efforts still, somewhat surprising perhaps, persisted in March 2020. Large institutional investors, index funds especially, continued to promote sustainability expectations even at COVID-19’s initial outset.

A potential explanation for the relatively consistent SHA efforts is that many efforts began before March 2020’s COVID-19 trigger date. Such efforts (according to Preparing for Shareholder Activism in the Wake of COVID-19 by Keith E. Gottfried, Morgan, Lewis & Bockius LLP) included advance notices deadlines for the receipt of director nominations and business engagements with targeted companies, management and boards, and disclosures to board members regarding nominees for 2020annual meetings. Generally, the DOW 30 and S&P 500 stock indexes recovered by the end of 2020 with the TSX stock index also showing similar signs of recovery during the same period. For example, major tech corporations faced a deluge of shareholder proposals on human rights, gender and racial pay gaps and climate change ahead of their May 27,2020, annual meeting dates.

SHAs have acknowledged COVID-19 as a tool for and against their efforts. Generally, COVID-19 impeded shareholder activists’ efforts because of the uncertainty, unpredictability and lack of precedent for engaging in activist campaigns during the global pandemic and related economic shutdown. In some instances, according to the Gottfried report, shareholder activists used COVID-19 to drive a “narrative that illustrates their pre-pandemic concerns with companies they target” to highlight the corporation’s “[l]ack of a strong, crisis-ready, and resilient board of directors and management team” or “[f]ailure of the company to successfully and quickly pivot its business model and strategy in response to the challenges posed by[COVID-19] when compared to industry peers.”

It is also interesting to note how corporations responded to shareholder activism during the beginning of COVID-19. In response to the sharp decline in share prices, corporations hit hard byCOVID-19 adopted poison pill provisions. Poison pills were a popular tactic in the United States for the 1980s, however professor Ofer Eldar of Duke University and Michael D. Wittry of Ohio State University noted their resurgence with approximately 73 U.S. firms adopting poison pill provisions between March 2 and June 30, 2020, including Sprint Airlines, Aviat Networks, Barnes & Noble Inc., to note a few popular names. In Canada however, corporations did not advance poison pill provisions because of the greater legislative protections against such tactics across the country.

Although Canadian corporations did not enact poison pill provisions, three trends emerged among actors in Canada since the start of COVID-19. First, SHAs focused primarily on influencing board composition. There was a substantive increase (30 per cent) of settlements between corporations and activists because of the potential financial and reputation damage that proxy contests can cause.

The importance of environmental, social, governance (ESG) factors persisted into the COVID-19 era and curiosity was expressed since 2020 marked the first year the Canada Business Corporations Act (CBCA) required disclosures for board diversity. Second, 2021 began with shareholder activists focusing on pandemic-like issues such as board diversity, corporate culture and improving internal governance to weather the storm of the pandemic. There was an overall reduction of SHA activity by six per cent compared to 2020 in Q1.

Canada remained consistent except for a single outlier. Third, ESG efforts continue to remain a key factor for shareholder activists. Canadian institutional investors continue to prioritize ESGs — this being primarily led through Canada’s eight leading pension funds. Corporations have also begun to receive comments on Rule 51-107 of the CBCA, which would require corporations to disclose climate change requirements. In fact, Glass, Lewis & Co. published a voting recommendation document outlining the aspects company’s board gender diversity disclosure. Executive compensation has also become a key issue for shareholder activists.

Concluding remarks
Looking back at the initial disruption of COVID-19 — which is still ongoing at the time of our writing— has shown that SHA efforts quickly rebounded and such activism in the corporate world is continuing as strongly as it was before the pandemic. We believe shareholder activism will continue to perform such progressive efforts and react proactively as such efforts have rebounded in the face of COVID-19 disturbance. It is quite remarkable that since 2014 there has only been one three-month span in which no new SHA effort was advanced and there is nothing in our research to suggest such a pause in SHA efforts in 2022. In fact, the war in Ukraine is a major example in 2022 of shareholder pressure on corporations to withdraw operations in Russia. Only time will tell how successful SHAs are in their endeavours to economically influence the war.