Susan J. Soprovich, Phoenix Strategies
“Shareholders have the right and obligation to set the parameters of corporate behaviour within which management pursues profit.”
Eliot Spitzer
In today’s market, there are more and more companies undergoing challenging situations that have the potential to seriously impact their future. For example, some petroleum companies’ future existence is being stressed by low and challenging prices and/or high debt levels. It has not been uncommon to see announcements over the past year or so that a company has set up a special Board committee to evaluate ‘strategic alternatives’ – a phrase indicating that the company is in some form of trouble (possibly bankruptcy) and may soon be involved in a sales process. Sometimes strategic alternative discussions result from shareholder activism situations, a growing concern for public companies.
Shareholder activism has grown significantly in both Canada and the U.S., often led by institutional shareholders who are upset with low returns, management actions or operational performance and seek to push change into organizations. A study recently conducted by Fasken Martineau, 2013 Canadian Proxy Contest Study, confirms that proxy contests are on the rise, with over 100 completed during the 2008-2012 period, representing an 84% increase over the previous five-year period. Also seen was a 98% increase in the number of contests focused on change in the boardroom (54% successful). The activism battles of companies such as Canadian Pacific Railway Ltd., Maple Leaf Foods, Agrium Inc. and SNC Lavalin Group are now common conversation topics, with the question not so much ‘when’ a situation will occur but ‘who’ is next.
When faced with such a challenge, the first reaction can be to panic, based on concern that hidden or personal agendas will force actions or a corporate sale at the expense of other shareholders. But there is hope, through two tools that provide companies with the time to react to shareholder activism and evaluate strategic alternatives to make the optimal decision for all shareholders: Shareholder Rights Plans and Advance Notice By-laws.
Rights Plans and Advance Notice By-laws
A Shareholder Rights Plan, commonly known as a ‘poison pill’, is a type of defensive tactic that was devised in the early 1980s to deal with hostile takeovers. Since that time, a variety of plans have been developed and more and more companies are adopting them.
The general objective of a Shareholder Rights Plan is to ensure that, in the event of a bid for control through an acquisition of the company’s common shares, the Board of Directors has sufficient time to evaluate the bid and explore and develop alternatives for maximizing shareholder value. In addition, adequate time is provided for shareholders to properly assess the merits of a bid without undue pressure and to allow competing bids to emerge.
The typical Shareholder Rights Plan involves shareholders having the right to buy more shares at a discount if one shareholder buys a certain percentage of the company's shares. The Plan could be triggered, for instance, when any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount – which causes dilution to the bidder’s interest and further safeguards the company. Knowing that such a plan could be called on, the bidder might be disinclined to try to take over the corporation without the Board's approval, and will first negotiate with the Board so that the Plan is revoked.
A newer method to attempt to control shareholder activism related to changes to the Board is through companies' adoption of Advance Notice By-laws. These are common in the United States for many large issuers, and are on the rise in Canada. For example, Sterling Resources Ltd. recently received an unsolicited bid to purchase all of the outstanding shares of the company and take control. As part of its activism strategy, the company adopted Advance Notice By-laws.
Among other things, Advance Notice By-laws enabled a procedure for notifying a company and a deadline by which shareholders must indicate an intention to nominate outside directors, prior to any meeting of shareholders at which directors are to be elected. They also stipulates that the information concerning the shareholders making the nomination and the proposed nominees must be included in the notice, for it to be valid. Advance Notice By-laws provides the Board with a reasonable time frame to evaluate the situation and formulate a strategy to address it.
What’s the Value?
Both Shareholder Rights Plans and Advance Notice By-laws provide management and the Board with time to deal with shareholder activism.
If your company does not already have one or both of these items in its toolbox, you might want to recommend putting them in place. With the rise in shareholder activism, it may not be long before your company is exposed to a situation in which they will come in handy.
Susan Soprovich is Principal at Phoenix Strategies in Calgary.