Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

Bill Ackman, CEO of hedge fund Pershing Square, arrives for the annual meeting Canadian Pacific Railway in Calgary, Thursday, May 17, 2012.

Jeff McIntosh/The Canadian Press

Canada's plans to significantly tighten rules that force disclosure by investors accumulating large stakes in companies are not popular with all shareholders, including the activist investor community that is now suggesting Canada may no longer be a target for shareholders trying to shake up management.

Depending on where you sit, that may or may not be a good thing. Hedge funds have their share of critics. However, if you are a long-time shareholder of Canadian Pacific Railway, for example, you might want a hedge fund doing activism. CP is worth more than double what it was when activist Bill Ackman of Pershing Square Capital Management got involved.

The goals of the proposal at first are hard to question. The market will know sooner who is buying into a company. What could be wrong with that? Plenty, it turns out, according to a broad swath of shareholders. It's not just activist hedge funds who are unhappy. There are significant questions raised by everyone from investors in Canadian small-capitalization companies to some of the biggest pension funds in Canada, including the Caisse de dépôt et placement du Québec and the Ontario Teachers' Pension Plan.

Story continues below advertisement

The rules that Canada is proposing are on the surface, quite similar to those in other regions.

The centrepiece is lowering the disclosure threshold from 10 per cent of a company's stock to 5 per cent. However, there are other changes that make Canada tougher.

First, in the U.S., once reaching 5 per cent, there is a 10-day window in which to file a report. That enables a fund to buy far more before actually disclosing. Many funds are able to hit double digits by the time the actual disclosure kicks in. Under Canada's proposed rule, the filing would have to be made immediately.

Secondly, not only would a fund have to file right away, under the proposed Canadian rule it would have to observe a one-day "moratorium" that would require a halt to buying for a full day.

The effect will be to make it very tough to acquire a stake of greater than 5 per cent at undisturbed prices. Once word is out that an activist is involved, the underlying stock usually takes off higher, making it more expensive for the activist.

And that, some in the activist industry argue, will make it difficult to do as much activism in Canada. An activist has less leverage with a 5-per-cent stake than a 10-per-cent stake, but speaking to some in the industry that is not the issue. Even a small stake is enough to push management.

The real issue is economic. Without a large stake, the returns are not big enough in many cases to justify the time and effort of a proxy battle.

Story continues below advertisement

"The lower threshold will make share acquisitions by engaged investors more expensive and, in many circumstances, too costly to justify the resources, time and effort for such activity. This, in turn, will chill the market for engaged investing, and erode the benefits of the value creation that results from having shareholder engagement," the hedge fund industry said in a letter to Canadian securities regulators.

It's not just hedge funds that are not happy. Everyone from small-cap managers to some of the biggest institutions in Canada has issues with the changes.

Ontario Teachers' Pension Plan laid out a similar concern to the hedge fund industry, saying that lowering the threshold to 5 per cent forces investors to consider whether it is worth the time and effort to try to dig up undervalued companies in Canada.

"We believe the combination of lowering the investment threshold to 5 per cent and the revised disclosure requirements will have the unintended consequence of incentivizing investors to invest less in Canada and to allocate capital elsewhere."

The Caisse de dépôt et placement du Québec, one of the country's largest pension funds, raised the concern that it is so big that it has 5 per cent of many companies. It would have to issue roughly 50 news releases a year, by its estimate, up from 10 currently. Having to disclose earlier, and more often (because any 2-per-cent change after that triggers another disclosure) will "hinder agility" for big funds, the Caisse argued, in asking for an exemption for passive managers.

At the other end of the spectrum, Hugh Cleland, a portfolio manager at BluMont Capital Corp., suggested the change could have a "devastating impact on the share prices, cost of capital and access to capital" for smaller companies. That's because many portfolio managers don't want to report holdings, and so limit themselves to holdings below the disclosure threshold.

Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies