Canada has seen an abrupt drop in activist activity this year, as the COVID-19 pandemic and plummeting oil prices kept activists at bay.

However, industry specialists tell Activist Insight Online, some of the decline could be attributed to a rise in private engagements and the saturation of a relatively small market, while noting the next wave of activism will be in the cannabis sector or utilizing environmental, social, and governance (ESG) issues.

More mature

Between January 1 and July 21 this year, 27 companies were subjected to activist demands, versus 45 in the same period last year, which had also fallen from 2018’s peak. Activist activity has declined in every single sector, with communication services, consumer defensive, energy, healthcare, and real estate feeling the absence of activist investors most in the first half of this year, with no public targets in those industries. The basic materials industry, however, continued to be the most-targeted sector, with 10 companies subjected to public demands.

In an interview with Activist Insight Online, Canadian law firm Goodmans Partners Jonathan Feldman and Brenda Gosselin noted that the decline in public situations is mainly down to the maturation of both companies and activists.

“Ten years ago, activists were seen as evil and bad and companies couldn’t engage with them,” noted Feldman. “Now all you need is eight seconds – engagement is the key.” According to the lawyers, activists now understand that they don’t have to go to battle every time they want a change, while companies’ responses have generally become more constructive.

“I think that activism is going through the dawn of a new era in Canada,” Norton Rose Fulbright Chair Wallied Soliman said in an interview with Activist Insight Online, noting that with every major board in the country including at least one director that has been involved in an activist campaign, the Canadian market has matured. “There is a changing road map as to how these things are to be settled.”

Fossil free

The level of activist investing is dependent on commodity prices, particularly oil. With the recovery of oil prices taking place in 2018, the number of companies targeted by activists reached an all-time high, before plummeting in the next years.

But as fossil fuels are increasingly uneconomic, this gives an additional reason to some activists to push energy companies on the ESG front. Earlier this year, Tribeca Investment Partners publicly urged Teck Resources to shed its energy and coal businesses and consider replacing long-standing CEO Don Lindsay, measures that the investor reckons could lead to a sixfold share gain over the next year. Impala Asset Management later joined the fight, claiming that four projects during Lindsay’s tenure had destroyed as much as C$12 billion of value.

In an interview with Activist Insight Online, Laurel Hill President David Salmon noted that the importance of ESG matters will begin to be critical in activism. Where ESG was not previously a key element of a campaign and only had a secondary or tertiary impact, Salmon reckoned it will be more relevant moving forward.

Indeed, shareholders are already willing to listen to such concerns, according to Norton Rose Fulbright Partner Heidi Reinhart. “If an activist thesis is reasonable and persuasive because there’s something there from a finance perspective and a true governance concern, smart shareholders always decide what makes sense for their support,” she noted in an interview with Activist Insight Online.

New highs

If persistently low commodity prices deter activists from targeting companies in the basic materials sector, the cannabis industry could prove exciting. Salmon told Activist Insight Online that there is an abundance of boards with weak governance in this sector that may be ripe for change.

Indeed, one group of disgruntled investors at Australis Capital voiced concerns earlier this year regarding a recent transaction with a company controlled by Scott Dowty, the executive chairman and former CEO of the U.S.-focused cannabis investor. Following pressure from the dissidents, the related party deal was scrapped but this gave rise to a board campaign by the group, which said the board should have never considered such a transaction, let alone recommend it to shareholders.

The cannabis sector has also attracted M&A activity, with Aurora Cannabis making a notable $1.1 billion bid for CanniMed Therapeutics in 2018, after successfully garnering shareholder support to block the company’s proposed acquisition of Newstrike Resources. “This is an area that is going to see a significant amount of activism relative to other sectors,” Salmon noted.