Average investors poised to become dissidents as companies face volatile markets

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All it takes to be an activist investor these days is an internet connection.

Retail shareholders have typically been ignored whenever public companies and dissident investors wage proxy battles, but no longer. Technological advances, combined with persistently volatile markets and economic conditions, have transformed the notion of activist investing to the point where even someone with just a handful of shares can play a decisive role in proxy contests.

Stock-focused apps, forums and message boards allow large groups of retail investors to join forces and “hunt in packs,” said Eric Morgan, a partner at Kushneryk Morgan LLP, a Toronto-based boutique corporate governance and dispute resolution law firm.

Proxy solicitation firms are keenly aware of the rising retail clout, with many designing new tools and tactics to engage with them. Kingsdale Advisors, a Toronto-based consulting firm that works with public companies on issues involving shareholder votes, is releasing a new mobile app in January that will allow individual investors to submit their ballots with their smartphones.

“People aren’t using landlines and snail mail any more, yet our entire industry has been based on landline communications and snail mail,” said Kingsdale chief executive officer Ian Robertson. “We are meeting investors where they’re at, which is on their mobile devices.”

Kingsdale employed modernized outreach tools – such as a text messaging campaign telling investors to be on the lookout for documents in the mail – during Rio Tinto Ltd.’s RIO-N prolonged battle to take Canadian miner Turquoise Hill Resources Ltd. private in 2022. It saw immediate results.

Only about a third of retail shareholders voted in Turquoise Hill’s previous annual general meetings, Mr. Robertson said, but he credits the new communication methods with boosting retail turnout to 88 per cent for the Rio Tinto transaction.

Activist investor campaigns have become increasingly common in Canada, with more and more of them being mounted directly by retail investors. Of the record-breaking 69 shareholder activist campaigns launched in Canada during the 2023 proxy season, only seven were from what Kingsdale described as “brand-name” activist investors.

Last April, a group of retail shareholders who collectively owned 12 per cent of London, Ont.-based Sernova Corp. SVA-T successfully campaigned for two members of their group to join the biotechnology company’s board of directors.

“That was a group of retail shareholders that primarily met through the message boards like Reddit, CEO.ca or Stockhouse,” said Christine Carson, the CEO of Carson Proxy, which worked with the Sernova group alongside Mr. Morgan. “Before social media, shareholders could ask for a shareholder list, but then they are having to look up phone numbers, they are having to call people, and then those other shareholders then have a stranger calling them asking for support.”

Not only has it gotten much easier for retail shareholders to connect with each other, Ms. Carson said, “it is also becoming easier in terms of fees, like legal fees and mailing fees.”

“Though companies are still required to mail material, they now have the option of e-mailing materials to shareholders if their e-mail is on file,” she said. “That means all of the Robin Hood accounts and all of the Interactive Broker accounts, for example, their shareholder material is now being e-mailed to them.”

While social media and low-fee brokers have been around for a long time, Mr. Morgan said the key element responsible for the more recent burst of activism among retail investors is advances in the voting process. Because many public companies adopted electronic voting methods during the height of the pandemic, he said, retail investors can carry out an activist campaign from start to finish without having to physically attend any meetings.

“That means even if a company’s shareholders are dispersed geographically, they can still be connected technologically and able to participate in activist campaigns without those traditional barriers,” Mr. Morgan said. “You don’t have to have all that formal infrastructure like an office on Bay Street.”

Retail activists still need professional help, Ms. Carson said, as “there are still a lot of roadblocks that companies can put up to prevent retail shareholders from having their say.”

One roadblock she cited is a newly proposed corporate bylaw developed by law firm Norton Rose Fulbright Canada and designed to thwart what it describes as “sneak attacks” from activist shareholders. The bylaw, which has been criticized as a method of watering down shareholder rights, would automatically postpone any shareholder meeting for 45 days where it appears that one or more unopposed director candidates will not receive enough votes to be elected.

Walied Soliman, the chair of Norton Rose Fulbright Canada, said the rules are already tilted heavily in favour of dissident shareholders, and “we are certain in our view that the balance needs to be brought back between boards and withhold activists.”

Reaction from the issuer community has been “exceptionally positive,” Mr. Soliman said. “We are getting calls from boards across the country.”

Firms such as Kingsdale are also growing more sophisticated in terms of finding relevant retail shareholders before outreach even begins. Digital tracking technology that allows advertisers to see which products internet users have viewed or purchased in the past can also be used to determine which investments they are likely to hold.

“If you go online and look at a certain stock chart, it is just like when you go to Amazon and look at a particular book and that follows you,” Mr. Robertson said. “The same concept applies here.”

That sort of work is going to become increasingly critical for companies looking to defend against activist campaigns, he said, regardless of what bylaws they adopt. Retail investors are more personally engaged with the stocks they own than ever before, and that trend is only expected to grow.

“The lesson for companies is that the populist uprising that you’ve seen in politics and pretty much all aspects of society, your shareholder base is not immune to that same sort of problem,” Mr. Robertson said. “There is an antiquated, elitist notion in corporate North America that retail shareholders are not sophisticated enough to understand the choices in front of them. That is not the case.”