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Canadian corporate directors worried about the possibility of activist investors stealthily lurking in the shadows will soon have a new method of defence.

On Wednesday, law firm Norton Rose Fulbright Canada will unveil a new corporate bylaw it has designed to thwart what it describes as “sneak attacks” from dissident shareholders who are trying to vote one or more directors off a company’s board. Otherwise known as “Vote No” or “Against” campaigns, such efforts differ from more common proxy battles in that they do not require activist investors to provide advance notice of their attack.

The law firm is proposing an amendment that companies can choose to adopt as part of the corporate bylaws that govern how members of their boards of directors can be added or removed. According to a Norton Rose webinar presentation reviewed by The Globe and Mail, the proposed bylaw 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. However, the board can also choose to waive the postponement.

The goal of the sneak attacks is to prevent directors targeted by activists from rallying shareholder support, thereby making it easier for them to be removed. Some question whether the tactic is widespread enough to require companies to adopt a new bylaw, but Walied Soliman, chair of Norton Rose Fulbright Canada, says updates to the Canada Business Corporations Act that took effect last year created a loophole that needs to be closed. Norton Rose Fulbright Canada has a history of proposing new corporate rules to offer better protection against activist threats.

“Directors are all freaked out about ambushes against them with these campaigns and it is becoming a real issue,” Mr. Soliman said in an interview. “What we have seen is not just a rise in the number of Against campaigns, but a rise in the number of Against campaigns being carried out in the shadows and we did not feel that was fair.”

The purpose, Mr. Soliman said, is to “ensure that disclosure is adequately provided to companies.” Otherwise, he said, it would be possible for dissident shareholders to take advantage of low voter turnout at an annual general meeting to boost their own voting power. For example, a dissident shareholder with a 25-per-cent stake in a company where only 40 per cent of total shareholders cast ballots to elect directors could wield majority control.

“Companies, especially those who have a low turnout or have never run an investor campaign around their annual meeting, are increasingly at risk,” said Ian Robertson, chief executive officer of Kingsdale Advisors, a Toronto-based consulting firm that works with public companies on issues involving shareholder votes. “With no cost and no transparency required, these guerrilla-style attacks will continue to threaten to throw boardrooms into chaos.”

In the 12-month period from July, 2022, through the end of June, 2023, Kingsdale data show seven “Vote No” campaigns were launched against six companies (Aurinia Pharmaceuticals Inc. was targeted twice). That compares with zero in 2022 and only three in 2021.

Riyaz Lalani, the managing director at Gagnier Communications who specializes in proxy contests, said in an interview that Vote No campaigns are quite common in the United States, particularly when related to mergers and acquisitions, “but now we are seeing an uptick in Canadian activity as well.”

“Vote No campaigns are an attractive alternative for shareholders who are precluded from running traditional proxy contests,” Mr. Lalani said. “That can either be because they missed a nomination deadline, got frustrated with advance notice requirements, or don’t necessarily want to run their own candidates.”

Christine Carson is not convinced such a bylaw is necessary.

Stealth proxy fights used to happen “all the time,” Ms. Carson, CEO of Carson Proxy, a Toronto-based firm that often works with activist investors, said in an interview.

However, she said, not only has the rise of advance notice bylaws nearly a decade ago “eliminated being able to do stealth campaigns, but even when it was open season where you could just show up at a meeting with enough votes to replace the board, they were few and far between.”

“If you are paying for lawyers and paying for a proxy solicitor, you’re not going to do a stealth campaign because you’re going to want to be assured of a win,” Ms. Carson said. “Doing it stealthily on the hopes that, fingers crossed, you get enough votes to get rid of the directors, that is just bad strategy.”

Ms. Carson also questioned whether the number of Against campaigns was truly on the rise in Canada.

“I actually work with activists,” she said, “and I am not getting calls from activists saying, ‘Hey, we want to do more Against campaigns.’ ”

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