As a result of the rising tide of shareholder activism in Canada, a number of defensive tactics have been developed by corporate management. The newest innovation in management's arsenal is the activist investor ban—an agreement between an issuer and a purchaser that restricts the purchaser from transferring its shares to activist investors.
Activist investor bans have recently become the norm in the realm of pharmaceutical mergers and acquisitions. Last month, for example, the Canadian drug maker Concordia Healthcare Corp. agreed to issue a 14% equity stake to a private equity firm, but not before putting an activist investor ban in place. The agreement prohibited the purchaser from selling or transferring the securities to more than 50 named activist firms in addition to anyone listed on the Sharkwatch 50—a compilation of the largest activist firms. These firms and investors were essentially "blacklisted".
It is not surprising that corporate management wants to maintain control of share ownership when large offerings are made, such as the Concordia Healthcare offering. Companies sometimes view activist shareholders as not having the long term health and profitability of a corporation in mind, and a large offering is an easy way for an activist shareholder to quickly acquire significant holdings. This risk can be combatted by placing resale restrictions and bans on the transfer of securities to known activist investors.
Of course, restrictions on the transfer of securities are nothing new. Canadian corporations have long imposed long waiting periods or 'lock-ups' and have prohibited transfers which would place a security holder over the 10% early warning threshold or the 20% takeover bid threshold. However, re-sale restrictions have rarely targeted specific investors and prohibited them from acquiring shares.
There is no prohibition on activist investor bans in Ontario. The securities regulators have commented that they may have concerns with agreements which restrict the transfer of securities to activist investors. This view is consistent with Canadian securities regulator's position on the importance of shareholder democracy demonstrated by their treatment of shareholder rights plans (see: Re Baffinland Iron Mines). It remains to be seen whether Canadian securities regulators will impose restrictions or limits on activist investor bans.
The author would like to thank Danny Urquhart, articling student, for his assistance in preparing this update.
Norton Rose Fulbright Canada LLP
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