How IROs Should Prepare for a Proxy Fight

It is the nastiest form of corporate warfare there is and it could be visited upon any Canadian public company, in any industry, at any time. Welcome to the age of the proxy fight.

While the past generation of Canadian IROs dealt with proxy contests sparingly, the rise of activist shareholders who seek disruptive means to create value – including shareholders from the U.S. operating in Canada – demands that today’s IROs become subject matter experts. This knowledge is required so that IROs can help their corporations avoid the triggers that lead to proxy contests:

lack of engagement with investors;
indifference to shareholder concerns;
consistent underperformance (or earnings misses), particularly following periods of stock ‘marketing’;
perceived Director weakness and/or conflict of interest;
unfulfilled M&A opportunities; and
muddled communication of strategy.

It’s not possible to amass expert-level knowledge by reading one article, but this issue of IR focus provides a primer on preparing for a proxy contest.

Know the Law

This is easier said than done, as there are a myriad of rules in Canada governing proxy solicitation, annual shareholder meeting processes, and activities such as making and responding to shareholder proposals. These rules can be found in provincial securities laws, Canadian corporate statues and corporate by-laws. The courts can also weigh in with so-called oppression remedies and in response to lawsuits brought for poor disclosure or breach of duty.

Due to the breadth and complexity of such rules, it is necessary to have deeply experienced legal and proxy solicitation teams lined up to ensure there are no missteps. At the same time, it behooves all IROs to understand their own corporate bylaws, which stipulate rules governing quorums at annual meetings and, in general, the fiduciary duty of Directors, which is to the company as a whole, not just shareholders.

What is most important to recognize is that except in very limited circumstances, legislation in Canada prohibits the solicitation of proxies unless the sender (Board or activist), provides shareholders with a formal information circular that includes prescribed information. Dissidents can have an advantage here as federal, Ontario and some other provinces’ legislation allows dissidents to solicit up to 15 shareholders without a circular. Since engagement with your shareowners will be frequent in the runup and during a proxy contest, this is a prohibition that must be observed.

That said, it’s not always clear when communication crosses the line into illegal solicitation. This determination is based on the legal concept of ‘principal purpose’, which takes into account the intent of communication and the related circumstances. The courts recently ruled on the topic after considering the case of a single press release issued by a corporate Board that responded directly to activists’ purportedly inaccurate statements. In the 2014 case of Smoothwater Capital vs. Equity Financial, the Ontario Superior Court determined that a single press release by the Board aimed at informing shareholders and responding to the activist’s apparently inaccurate statements, without requesting proxies, was not a proxy solicitation. However, the court noted that a series of press releases could constitute solicitation.

It is also advisable to stay abreast of changes and/or developments on the regulatory landscape; National Policy 25-201 Guidance for Proxy Advisory Firms is a recent example. As proxy advisory firms are key influencers in proxy contests, understanding how they arrive at recommendations is valuable.

Contemplate the Dissident’s Playbook

No two proxy contests are the same; however, there are similarities in approaches, including activist accumulation of toehold positions in a stock before declaring ‘game on’. Monitoring trading volumes and changes to your shareholder base and listening to the grapevine for signs of shareholder discontent are best practices in any event, and are a good way to spot a potential threat. Once identified, it’s important to research the activist’s track record with other public companies. This may reveal the depth and breadth of actions the activist is willing to take.

Typically, the dissident playbook includes outreach to:

other shareholders to discuss your corporate performance in a bid to gauge potential support; and
company Directors to raise issues, seek common ground and issue demands.

If the latter does not lead to change that is acceptable to the dissident, communications before a circular is filed escalate to letters of complaint, phone calls, meetings, media and, in recent times, social media outreach. Every communications tool will be used. So-called bear hug proposals to buy (which the Board is obligated to consider) are also relatively common.

Weigh Your Capacity to Fight

Dissidents take on large and small Canadian companies, although their win rate, at least if 2014 is an indication, is much higher when combating companies with less than $50 million of market capitalization. In many cases, dissidents have the resources to fight a war of attrition, whereas micro-caps typically do not possess the means (financial or otherwise) to do battle 18 hours a day, seven days a week for months on end.

Even for resource-rich companies, it’s advisable to staff up and seek outside IR counsel. For the IRO, it is not acceptable in these circumstances to let certain tasks slide or to give short shrift to items like preparing your CEO for investor meetings or media interviews. Communication missteps provide ammunition to the dissidents and lack of IR horsepower is not an excuse.

Speak Up And Do So Carefully

It is best practice to adopt a communications plan for a proxy contest. This plan should prescribe key messages or proof points that will stave off attacks and support the company’s strategy for creating value. The plan should be heavy on shareholder engagement, contain an honest evaluation of current investor perceptions toward management/the Board and preach openness (i.e. allow for the possibility that the dissident may have constructive ideas that should not be rejected out of hand). All messaging should emphasize facts that will challenge and weaken the dissident’s position. Note the emphasis on the word facts: any statements that a company makes that smell of desperation, contain hyperbole or include personal attacks, will undermine its credibility with other shareholders. The plan should contemplate:

communication between Directors and management (dissidents try to divide Boards and conquer and this presents a host of challenges for IROs caught in the crossfire);
interactions with the media (media training for every corporate spokesperson is a must);
judicious use of social media including Facebook, YouTube and Twitter links to previously announced corporate positions (so as not to violate selective disclosure or non-solicitation rules or the best practice noted above of fighting fire with factual statements); and
employee communications (a proxy contest will be unsettling to employees and, if left unchecked, will distract the workforce from performing, which serves the short-term interests of dissidents).

Plans must also acknowledge the proxy time clock. It counts down from the filing of proxy materials, which is accompanied by a news release and a so-called ‘stop, look, listen’ letter or advertisement to shareholders. Usually, five or more fight letters are issued during a contest, with accompanying news releases. One news release/fight letter always follows decisions by proxy advisory firms.

Proxy contests are nasty, prolonged and expensive. Ideally, they can be avoided through good IR practices, but when they can’t, it’s incumbent upon IROs to play a constructive and informed role in defending the company’s position.

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