In 2014, Canadian companies witnessed fewer board-related and transaction-related proxy contests, with management posting its strongest showing since 2011, according to the latest update of Fasken Martineau DuMoulin’s Canadian proxy contest study. Reasons for the impressive outcome, suggest Aaron Atkinson and Bradley Freelan, Partners in the Securities and M&A Group at the firm, include greater attention to shareholder engagement and far better preparedness on the part of Canadian managements and Boards.
“Overall, there’s been a downward trend to the number of proxy contests since the financial crisis,” says Freelan. “Anecdotally, we’ve seen management and Boards be more proactive in terms of shareholder engagement. They’ve reached out to shareholders and made sure shareholders understand their stories and what management is trying to accomplish.” He continues: “We’ve also seen managements and Boards be better prepared for a potential activist to show up on the scene.”
Atkinson is also convinced that highly publicized routs for management, such as Pershing Square Capital Management’s successful 2012 proxy fight against Canadian Pacific Railway, made an indelible impression. “Managements have definitely become more prepared,” he says. “And certainly last year they were willing to fight harder.”
Shengjun (Victor) Li, Vice President of Governance Advisory and Proxy Analytics for Kingsdale Shareholder Services in Toronto, says that Fasken Martineau’s survey results, while encouraging, should be taken “with a grain of salt” because each shareholder contest is unique. That said, Li acknowledges that Canadian managements are now better equipped to win proxy fights than they were even a few years ago.
Big Game Hunting in Canada
After the financial crisis, M&A slowed and activists began to see Canada as fertile grounds for proxy battles, explains Atkinson. Inside and outside Canada, activists drew a bulls-eye on Canadian companies for a host of reasons, among them the rule that Canadian Board members need majority votes to hold onto seats and the fact that activists can accumulate a 10% stake in a Canadian target before publicly disclosing the position, as opposed to the 5% threshold in the U.S. “In 2011 and 2012, there was a lot of big game hunting,” he says. “You saw the Canadian Pacific contest, the Agrium Inc. fight, and a run at RONA.”
Freelan points out that in the seven years of proxy activity studied by Fasken Martineau, “there’s been a shift to more professional activists who certainly have more resources behind them.” As has been widely noted, ‘activism’ now constitutes its own asset class. In a January 2015 J.P. Morgan report entitled The Activist Revolution, the activist asset class was estimated to have $112 billion in assets under management.
In the past few years, Boards and managements have become savvier, too. “You’re really behind the eight ball if the first time you go to see your shareholders is as a result of an activist showing up on the scene,” says Freelan. He believes that larger companies now understand the imperative to visit and communicate with shareholders well before trouble is brewing.
David Salmon, Senior Vice President at Laurel Hill Advisory Group in Vancouver, points out that management preparedness has taken many forms, including creating provisional teams to plan a response should a problem arise and even sketching out detailed response scenarios and timelines. He points out that many companies are engaging in emergency exercises prophylactically.
Managements are not alone in having made a giant step forward in terms of sophistication and preparedness. Salmon argues that Boards have stepped up, too. At least in part, he credits the successes of TELUS Corp. against Mason Capital, a U.S.-based hedge fund, and Agrium against Manhattan-based Jana Partners, to each company’s fully prepared and engaged Board. “When a dissident or activist does appear, [Board members are] prepared to go to the mat and fight,” says Salmon.
That the only Canadian activist battle lost in 2014 occurred at American CuMo Mining Corporation – a micro-cap – indicates just how sizable a role managements and Boards can play, maintains Salmon. Small companies, he explains, are often operating “by the skin of their teeth.” He continues: “I’d suggest that micro-caps don’t have the resources to prepare themselves and undertake the full analysis that Boards and managements [at larger companies] would do.”
Over the past few years, there has been a sea change in attitudes within typical boardrooms. “Directors no longer feel threatened or compromised by the fact that a shareholder might want to talk to them,” says Carol Hansell, senior partner at Hansell LLP in Toronto. She believes that issuers “understand better now that their shareholders have tools that they can use to make their voices heard, and they’re not afraid to use them.” Nor is pragmatism the sole motivation. She also finds that “issuers are engaging more with their shareholders because it’s the right thing to do.”
When a Fight Breaks Out
Deciding how fiercely to fight a proxy threat can make all the difference between a management win and a loss, says Kingsdale’s Li. “Management always has more resources to deploy. It’s just a matter of will. Sometimes managements don’t want to spend money to fight, and Boards want to take the high road,” he observes. “And sometimes the dissident is testing the waters, looking for a quick settlement and a chance to sell the shares and move on. But sometimes the dissident really wants to fight ‘til the end. In that case, management must get more serious.”
He continues: “We always look at who’s on the other side of the table. A fight is very expensive. It’s a chess game. Both sides need to know what the other wants.”
Atkinson believes that headlines depicting enormous professional fees paid and management time lost in high profile proxy contests like Agrium and CP have spurred executives to become more aggressive, as is evidenced by management’s greater use of litigation in 2014. Increasingly, he says, companies are legally challenging a dissident’s disclosure or “whether the dissident was foursquare within the proxy solicitation rules.” Most issues, says Atkinson, boil down to procedural foot faults: “Did [the activists] fail to make public disclosure of their position? Or maybe they had allies in the shareholder base, such that they were acting jointly or in concert?”
That said, Freelan points out that litigation tactics rarely put paid to a proxy contest but may instead create a little breathing room. “You can use the delay to get your message out there, reach more shareholders, and release better results to the market, if you’re straddling a quarter,” he says.
A Victory for IR?
Although many corporations are communicating more proactively with shareholders, the pendulum keeps swinging. Sometimes activists seem to enjoy a clear advantage in dustups, and at other times, management pulls ahead.
Since the pendulum will inevitably swing back, smart IROs are not crowing over recent victories, but are instead looking at ways to continue upping their game.
Ron Schneider, Director of Corporate Governance Services at RR Donnelley, has noticed that disclosures by North American companies have made dramatic strides in recent years, not only in terms of content but also in the navigability and design of the proxies being distributed. “We’ve seen progress by many, many companies with additional ones, each year, taking their initial steps in that direction,” Schneider says, adding: “The quality, visual appeal and navigation of Canadian circulars is very impressive.”
Hansell agrees, noting that the argument for providing more comprehensive disclosure is now “hardwired” into Canadian issuers. She believes that IROs play a key role in bolstering shareholder engagement and improving disclosure. “Issuers have more sophisticated investor relations functions, and organizations have people clearly responsible for governance matters,” she observes.
Improved disclosure is laudable and may help ward off activists, but disclosure alone is “no silver bullet,” according to Freelan. He points out that Canadian Pacific had “a blue chip Board and gold-plated disclosure,” but the company still became a target when performance flagged. “It’s hard to imagine that strong disclosure that paints the company in a good light can hurt,” says Freelan. “But on the other hand, if the stock price is underperforming, there’s probably no amount of disclosure that’s going to fix the situation.”
Salmon also sees the role of IR as critical, noting that a proactive investor relations professional can help create preparedness profiles and even draft mock activism scenarios. “Investor relations officers are the people with the feet in the Street,” he says. “They’re speaking to institutional sales, the analysts, the back offices – and, most importantly – the shareholders.”
He continues: “If investor relations has a detailed list of shareholders and can account for a significant proportion of their shareholders’ thoughts, that helps you develop your preparedness plan, engage with your Board, understand where you need to have critical discussions, i.e. think like an activist, and then develop strategies.”
Arguably, Salmon sees the most pivotal role for IR as serving as a conduit for information. IROs are poised to receive key information from shareholders that they then can communicate to the Board. In the event of a proxy battle, IROs are also able to solicit feedback, help get out the vote, and ensure that corporate strategy is conveyed accurately and to the right audiences. “The IRO plays a large role in communications,” he concludes. “If the right information is not communicated to the Street and all your stakeholders, then there’s going to be surprise when a proxy battle comes.”