Coordination and Monitoring in Changes of Control: The Controversial Role of 'Wolf Packs' in Capital Markets

Abstract

Given recent empirical work suggesting that Canada is one of two countries in which outcomes favourable to shareholder activists are more likely than in the US, one might wonder whether shareholders in Canadian public companies have become too empowered. This concern is perhaps especially acute in light of the light of controversies arising from the emergence of packs, which are loose networks of parallel-minded shareholders (typically hedge funds) that act together to effect change in a given corporation without disclosing their collective interest. This article analogizes the role of wolf packs in the corporation to that of the blockholder. It isolates certain conditions in which the formation of wolf packs is optimal such that wolf packs are able to overcome the coordination costs that can ordinarily impede shareholders from forming de facto blocks to monitor the corporation's directors and management. At the same time, however, they are able to circumvent the disclosure rules that typically apply to such groups. Because wolf packs are able to wield significant influence in corporate affairs without disclosing their collective interest to other investors, this article argues that the disclosure rules relating to wolf packs in Canada should be tightened and clarified.