Guide to Shareholder Activism and Proxy Contests in Canada

There is an exemption to the requirement to file an HSR Act notice if the investor acquires less than 10% of the voting securities of the company and has a passive intent. In addition, some investors use cash-settled equity- based derivatives in order to obtain an economic exposure to companies subject to the HSR Act because such instruments do not count toward the applicable thresholds for the purposes of HSR Act notification. 05. Group Formation: Insider Trading and Joint Actor Characterization One of the challenges faced by activists in Canada is gauging and organizing support from major Canadian institutional investors. Canadian institutions are wary about aligning themselves publicly with a dissident shareholder, at least at the beginning of a contest, primarily out of concern to preserve their freedom to trade in the securities of the target issuer. Their concern stems from two considerations: insider trading and joint actor characterization. INSIDER TRADING Under Canadian insider trading rules, a person in a special relationship with a public company (which includes, in addition to Canadian public companies, any issuer, wherever situated, whose securities are publicly traded) is prohibited from trading with knowledge of material non-public information (MNPI). This prohibition extends to anyone who learns of MNPI from a special relationship person. The Canadian rules are statutory and do not turn on notions of “duty” and “misappropriation.” The category of “special relationship” persons is large and includes tippees and a person that beneficially owns more than 10% of the voting securities of the target company. Thus, an activist holding more than 10% of a company’s shares is a person in a special relationship with the company. Information that the activist may learn in discussions with the target company about, for example, the target’s business plans or the target’s response to the activist’s proposals may amount to MNPI that, if communicated by the activist to an institutional shareholder, will restrict that shareholder’s ability to trade. It is even possible in these circumstances that information about the activist’s own plans vis-à-vis the target company could amount to MPNI that, if disclosed to an institutional shareholder, would similarly restrict that shareholder’s ability to trade. Even if the activist is not a special relationship person, securities regulators may nonetheless take the view that the disclosure unfairly advantaged the recipient of the information in a manner that was “contrary to the public interest,” as securities regulators have done in Canada in other contexts. JOINT ACTORS The second concern relates to the issue of “joint actor” characterization, which under Canadian securities law is relevant both for purposes of the early warning disclosure requirements and for compliance with Canada’s takeover bid regime.