Tough markets will bring more proxy contests in 2013

Kevin Thomson is a senior partner at Davies Ward Phillips & Vineberg and has acted in a number of proxy battles on behalf of both activist shareholders and target companies. Last year Davies represented Bill Ackman and his hedge fund Pershing Square to replace a number of board members at Canadian Pacific Railway. Davies also acted on behalf of Jana Partners, a U.S. fund that sought a reorganization of the fertilizer giant Agrium. Thomson recently spoke with The Northern Miner about the increasing number of proxy contests in the mining industry.

The Northern Miner: Have you seen an increase in the number of proxy battles recently?

Kevin Thomson: In our office in Toronto last year we had more proxy contests and cases of threatened shareholder activism than we had in the previous five years put together. How do we see this year shaping up? This is just the start of proxy season, and our prediction is that we’re going to see a lot more of it.

A major precipitating event has been the successful effort by our client — Pershing Square, led by Bill Ackman — to replace a significant number of the board members at Canadian Pacific Railway (CPR).

TNM: Why was CPR such a watershed event?

KT: To see Pershing Square take on a company as large as CPR and with as marquee a board as CPR had, and then see the subsequent enormously positive impact on CPR’s share price, has had a profound impact on the thinking of many substantial investors in Canada. Ackman sent a message that the shares were undervalued, and it turns out he was right, because CPR’s shares have almost doubled since he came on the scene. There’s really been an awakening at the institutional and large individual investor level that if Pershing Square can have the success it had, then it’s no longer time to sit on the sidelines and be unhappy with a significant investment. It sent some strong messages. No. 1: With some hard work, but without going to the ends of the earth, you can win a proxy contest; and No. 2, no Canadian company is too big to be attacked.

TNM: Your firm also acted on behalf of Jana Partners, which was agitating for change at Agrium. Can you comment on that case?

KT: This was their first foray into shareholder activism in Canada. They were public, and determined to unlock shareholder value.

TNM: You also acted on behalf of Oliver Lennox-King, a dissident shareholder at Roxgold, who wanted to replace the board. What was the catalytic event for him?

KT: He watched what happened at CPR and was unhappy with Roxgold’s board and senior management. He was the largest shareholder and had a strong belief in what he saw as the enormous value of Roxgold’s mining project in Africa, which was not reflected in the share price. He called us and said: ‘What do you think?’ And from that phone call it was about two weeks before he launched his dissident proxy contest to replace the entire board, which was successful. Roxgold was a classic example. I do not believe our client would have proceeded if he hadn’t witnessed the success of Pershing Square in CPR.

TNM: What other factors are triggering these proxy fights?

KT: When shareholders are making a lot of money they’re not focused on the perceived failings of their boards. When their wallets are being hurt, that’s when they start to look at proxy contests and other shareholder activism. Share prices in the mining industry are getting hammered across the space.

TNM: Are proxy fights easier to launch in Canada than in other jurisdictions?

KT: You can win a proxy contest in Canada without being dragged into the courts, like in the U.S., where it is more difficult. Canadian companies are more at risk relative to their counterparts in the U.S. because it’s relatively easier to pull it off in Canada. Canadian ­corporate legislation makes it much easier. It is simple under Canadian law to requisition a shareholder meeting. If you want to act between annual general meetings (AGMs) all you need is 5% of the stock, and you can force a public company to have a meeting and you can put forward a motion to replace the board. In the U.S. it would be much more difficult. Proxy contests are generally governed by state law. In some states you must demonstrate cause to remove a director, and forcing a public company to have a meeting between AGMs is much more difficult than it is in Canada. Staggered boards exist in the U.S., but not in Canada, and that makes it much more difficult in the U.S.

TNM: In what other ways is Canada an easier jurisdiction?

KT: In Canada if you accumulate more than 5% of the stock you’re virtually guaranteed that a meeting has to be scheduled in the following two to three months, and at that point, it’s a 50% vote, plus one vote of those who show up at the meeting. An activist also can simply wait to act at the company’s AGM. A good turnout for a Canadian public company would be something like 65% of the shares being voted. So if you have proxies that represent 33%, you’re going to win. The second factor is that in a lot of Canadian companies, especially in the mining space, it’s not at all uncommon to have large chunks of stock held by between four and eight shareholders. So if you end up in a situation where you have six shareholders that own just over 30% of your shares — which would be quite typical for a junior or intermediate mining company — those six shareholders, more or less, can determine the vote.

TNM: Are there other differences?

KT: Canadian proxy solicitation rules allow a dissident to approach up to 15 investors on a private basis without ever filing a document with the securities regulators or telling the target company what they’re doing. As an unhappy investor you could quietly approach each one of those investors, and if they are prepared to support you and the company is not protected through an advance-notice policy — and most are not — you literally can deliver proxies to the target company 48 hours before the AGM, where the effect of those proxies is you have enough votes to vote out the board. And that’s really a serious challenge for an enterprise that gets caught off guard.  

TNM: How can companies deal with a situation like that?

KT: The typical response is to postpone the AGM, which gives them some breathing room to convince some of the supporters of the dissident to withdraw their proxies. Oliver Lennox-King of Roxgold announced four days before the AGM that he had about 30% of shares voting with him to change the board. Roxgold elected to postpone the AGM, but a mistake they made tactically was to postpone the meeting by two and a half months, which is much longer than the norm. The effect of that two-and-a-half-month delay was that it really poisoned the board’s relations with the Roxgold shareholders. There was a widespread view that the directors went too far. 

TNM: So what is the best approach a company can take?

KT: Most boards would postpone the meeting for four-to-six weeks, and during that period they would go out and circle the wagons with their shareholders and try to convince them the attack is not justified, and that they are proper stewards of the company. Having a properly constructed advance-notice policy that prevents last-minute surprises is also highly advisable.

TNM: Is it easier for a target company to fend off an attempt to replace its entire board than to defend against calls for resignation
s of a portion of the board? 

KT: Yes. Going after a portion of the board is challenging for a target board to defend against. It is typically much easier to get a recommendation from the proxy advisory services in favour of the activist when it is simply trying to replace two or three of the directors, because their view is, how could that possibly be damaging to the company? . . . It puts the target board on its heels.

TNM: Looking ahead, what do you see on the horizon for mining companies?

KT: In Canada last year we saw twice the number of shareholder-activist situations than we did in 2011. So there is momentum, and the dramatic decline in the valuations of mining enterprises around the world presents an opportunity for activism. It creates investor discontent. When everything is riding at 52-week highs you don’t hear much, but when it’s trading at 52-week lows, there’s a lot of investor dissatisfaction.

TNM: What can companies do to improve their chances in this kind of environment?

KT: If there’s a belief that the board is on top of the issues and that it understands shareholder concerns, that can buy a lot of goodwill. The companies that are more at risk are those that stiff-arm their investors. It’s all about maintaining relationships, especially if you have a chunky shareholder register. When you have five or six big investors, you need to stay close to them. Make it clear that you’re sympathetic to their perspectives and that as a board you’re prepared to undertake change. The boards that get into trouble are the ones that ignore their shareholders or have poor relationships with them. That is where the friction starts. And if you have a shareholder sitting on 8–9% of your stock, they’ll know what the shareholder register looks like, and if they can make eight to nine phone calls and find out that there is a lot of shareholder dissatisfaction, then the board is in for it. So with valuations as low as they are right now in the mining industry, and with this wave of shareholder activism that has swept the country since CPR, our view is that there is a good likelihood this year will see even more activism than we saw in the spring, summer and fall in Canada last year.

TNM: How many companies have made the shift from slate voting to individual voting for board members?

KT: Quite a number have shifted. The vast majority of the largest public companies now have individual voting for directors, and quite a number of smaller and medium-sized companies have moved in that direction. As of Dec. 31, 2012, the TSX requires issuers listed on that exchange to have individual voting for directors, so that requirement will be in effect for the 2013 proxy season. It’s a movement that started several years ago and has taken hold. Often companies that adopt individual voting also adopt majority voting policies that require directors who do not get at least a majority vote in their favour at the AGM to tender their resignations. The confluence of individual voting and majority voting policies makes it relatively easy for an activist investor who doesn’t want to run a proxy contest to instead run a withhold-vote campaign to try forcing change in a public company’s board. 

TNM: How would such a campaign be conducted?

KT: Typically the activist will pick a particular committee on the board and suggest to other shareholders through regulatory filings or press releases that they should withhold their votes from the directors on that committee. If the suggestion gains momentum and the directors do not get a majority vote in their favour at the AGM, they must tender their resignations . . . it is difficult for the rest of the board not to accept those resignations. The activist shareholder will typically put forward nominees to fill the vacancies. Unlike proxy contests, the activist has no assurance its nominees will get board seats, but the activist will have achieved its primary objective of shaking up a board it is unhappy with, and in some cases, without a lot of effort or cost.