Here's a simple question: if you, the reader – client or lawyer – were asked to navigate the maze that is the global proxy voting process (see chart to the right), would you go through the proxy voting process without a guide?
Surely not. And as it turns out, you would be one of a growing number of companies and shareholder activists, large and small, who are finding that descending onto the battlefield of a proxy fight without a proxy solicitation agent is akin to the Duke of Wellington sending his troops to Waterloo without their weapons.
“The proxy system in North America is so byzantine that proxy solicitors can provide a lot of value because they can work the street and get to the real decision makers,” says Gordon Chambers, a partner in the Vancouver office of Lawson Lundell LLP.
In Canada, the guides you would most likely hire would be among Canada's four major proxy-solicitation and shareholder-services firms: Georgeson, Kingsdale Shareholder Services Inc., Laurel Hill Advisory Group LLC and Phoenix Advisory Partners. “As soon as there's a proxy battle on the horizon, we tell our clients that one of the most important decisions they make will be which proxy solicitation agent to hire,” says Andrew McDougall in Osler, Hoskin & Harcourt LLP's Toronto office.
But even if you're one of the few stakeholders in the public markets who would consider going it alone, you may still want to read on: you'll discover that dangers abide that you didn't even imagine existed. As Institutional Shareholder Services (ISS), the proxy-advisory company (a different animal from a proxy-solicitation firm, as explained later) that designed the flow chart, noted above, proxy voting is “a complex process with many steps, very few standards, and many different owners of information.”
Indeed, David Salmon, Laurel Hill's Senior Vice President, Western Canada, estimates that there are 1,200 steps in a shareholder meeting process. That alone should provide cause for caution.
So much so that a team of lawyers from Davies Ward Phillips & Vineberg LLP spent 16 months researching their now-landmark discussion paper titled The Quality of the Shareholder Vote in Canada. “In our experience with shareholder meetings, we encountered a variety of obstacles in making sure that votes are cast and counted, and we became concerned with the quality of the shareholder vote in Canada,” says Carol Hansell, who co-authored the paper, released in October 2010, with colleagues Mark Connelly, Michael Disney, Gillian Stacey, Tim Baron, Adam Fanaki and Richard Fridman.
While not directly addressing the growing role of proxy-solicitation agents, the paper is a guided tour through the pitfalls in the proxy voting system. “Carol's paper is the Bible on proxy voting,” says David Woollcombe in McCarthy Tétrault LLP's Toronto office.
Hansell and her colleagues list a number of features that make the system so complex. First
off, most retail and institutional investors hold their interest through intermediaries, so there is no direct relationship between issuers and investors. “Eighty per cent of Canadian companies have no idea who their major shareholders are,” says Wes Hall, Kingsdale's president and CEO;
The intermediaries hold shares in “fungible bulk,” which means that “the intermediary has a position in the aggregate of all the shares in which it holds an interest for clients” and each share is identical, so investors are unconcerned whether they hold one share as opposed to the other;
Canadian law allows investors to withhold their identity from the issuer. Investors, therefore, may be objecting beneficial owners (OBOs) who instruct intermediaries to protect their anonymity, or non-objecting beneficial owners (NOBOs);
Third-party service providers operate the proxy voting system. “Transfer agents and proxy solicitors act on behalf of issuers, proxy agents act on behalf of intermediaries and proxy advisors act on behalf of investors,” the authors of the Davies paper note;
The process features a multitude of parties and at least as many different systems and databases;
Communications between issuers and investors are not transparent.
What makes things even more complicated is the fact that the intervention of hedge funds and arbitrageurs change a company's shareholder profile significantly between the first offer and the date of the vote. M&A lawyers estimate that, whenever a deal is announced at a premium to market, some 10 to 30 per cent of the shareholder base bails out. Typically hedge funds and arbitrageurs come in and displace much of the institutional shareholder base.
“Even when you think you know your shareholder base well, things can change rapidly when an offer comes in,” says Daniella Dimitrov, President of DDimitrov Advisory Corp. and Vice-Chair of the Baffinland board when a hostile bid emerged. “Within three days, our stock had turned over at least once, and we had no idea who was doing the buying. So it was a good thing we had Phoenix and Glenn Keeling, a partner there, involved and at the table with the lawyers and bankers. Phoenix were the ones who kept us up to date on who the players were whenever the stock had a big turn.”
Finally, the jurisprudence on proxy solicitation is embryonic. “It's not even clear what constitutes a solicitation,” says Walied Soliman, a partner in the Toronto office of Norton Rose OR LLP. “And that's an issue that matters very much because dissidents trying to take over a company can't speak to more than 15 people without putting out a proxy circular.”
To be sure, the role of proxy-solicitation companies is not to remedy these concerns. It is to navigate them and make sure the vote gets out for their client, be that issuer or shareholder. But so long as the system maintains its complexity, the growth of the proxy-solicitation industry in Canada should come as no surprise.
Still, there's another factor at play here: the growth of shareholder activism over the past decade, a dynamic that has of late allowed minority shareholders of all stripes to set agendas for many corporations.
Although Canadian institutional investors for the most part sat on their hands in the wake of securities frauds like Bre-X and YBM Magnex in the late 1990s even as the US was embarking on a new era of shareholder activism, a handful of institutions did step up about a decade ago.
In 2001, for example, the Ontario Public Service Employees Union (OPSEU) filed a class action against Nortel Networks after the company's accounting scandal became public — but in the Southern District of New York, not in Canada. The Ontario Teachers' Pension Plan Board also filed in New York and eventually became co-lead plaintiff in the Nortel suits. The ensuing US$2.5-billion settlement was the largest recovery ever in a securities case involving a Canadian issuer.
When Teachers decided to go after Biovail Corp. in 2003, again its officials flew down to New York. The result? A US$138-million settlement, the second largest ever involving a Canadian plaintiff.
What also fuels shareholder activism is the pervasiveness of hedge funds in North American capital markets. There are almost 10,000 hedge funds in the US and they control over $1 trillion in assets. Some estimates suggest that hedge funds are responsible for 40 per cent of the volume on the New York Stock Exchange.
But as demonstrated during the high-profile battle over the share restructuring at Magna International and the recent outcry over Research In Motion Ltd.'s disappointing financial figures, it's not just in M&A transactions that shareholder activism has asserted itself. Organizations such as RiskMetrics and the Canadian Coalition for Good Governance (CCGG) are growing in size and becoming more vocal in their opposition to board decisions.
And while the CCGG has for the most part been focusing on the biggest companies on the S&P/TSX 60 index, it announced in June 2011 that it now has its sights set on the tier below. CCGG Chairman David Denison, who is also CEO of the Canada Pension Plan Investment Board (CPPIB), has made it clear that it will not hesitate to wage proxy battles where necessary to achieve its aim.
Indeed, the CPPIB has already implemented a test case by jointly filing a proxy resolution with British Columbia Investment Management Corp. asking European Goldfields Ltd. to adopt a majority voting policy. The resolution passed easily.
None of that surprises Chris Makuch, Georgeson's Vice-President, National Sales & Marketing. “Smaller transactions are now engaging proxy solicitors whereas five years ago only the big companies and the big deals engaged them,” he says.
As institutional investors abandon their traditional support of management for aggressive or quiet support of shareholder activism, setting the agenda can take many forms, including pressuring boards to enhance share value by paying special dividends, buying back stock, selling divisions, or even getting rid of management, as Ontario Teachers' Pension Plan did in the UK when it called for the ouster of Vodophone Chair John Bond. Activist shareholders have also been behind the “say on pay” movement, majority voting for directors and attacks on dual-share structures.
“Nobody cared about proxy-solicitation companies 15 or 16 years ago,” Keeling says. “But what became apparent around the turn of the century was that a company that didn't motivate its shareholder base to turn out in decent numbers at meetings would find itself in a heap of trouble. Then we started to get into more contested environments and things took off.”
Still, it's not the just the anecdotal evidence that speaks to the growing prevalence of proxy battles and the growing engagement of proxy-solicitation firms. The statistics are also compelling.
According to Proxy Contests in Canada — 2003-2011, a survey of proxy contests in a non-M&A context conducted by Kingsdale, 2003 saw only six proxy contests in Canada. By 2009, that number rose to 43, almost half as many as the cumulative total in the preceding six years.
The following year, 2010, saw a decline in proxy contests to 20 — which is perhaps not surprising considering the perceived improvement in the global economy. But by July 2011, there had already been some 15 proxy contests in Canada.
Kingsdale's figures also reveal that proxy agents were not retained on either side of more than half the 52 proxy battles in any year between 2003 and 2007; indeed, only 20 of the contests in that period featured a proxy-solicitation firm. By contrast, between 2008 and 2011, 73 of the 103 proxy battles listed by Kingsdale engaged proxy agents, and 38 involved proxy firms for both management and dissidents. In 2011, just one of 15 proxy fights lacked proxy solicitors. “This century has featured steady growth in our industry,” Salmon says.
But just what was at stake in these proxy battles and how did management fare? As it turns out, the stakes were high. Throughout, most of the battles were over board or partial board replacement. And, by way of tribute to the growing power of the shareholder activist movement, it turns out that management didn't do all that well on the playing field.
According to Kingsdale, management “won” 73 times, dissidents “won” 55 times, the matters “settled” on 23 occasions, and four cases ended in other ways. If the number of dissident wins and the matters settled are combined, and on the assumption that management had to make some concessions to settle, management's original position was comprised more than half the time.
None of this, of course, takes into account the stakes involved in M&A proxy battles resulting from hostile bids. Interestingly, both the target and the bidders retained proxy-solicitation firms when LSE and TMX announced their intention to merge, then were confronted by a hostile bid from the Maple consortium. The same was true when Nunavut Iron Ore and Arcelor Mittal made hostile bids earlier this year for Baffinland Iron Mines.
Not so long ago, however, when Xstrata PLC bid for Falconbridge Limited in 2006, Falconbridge didn't bother to retain a proxy-solicitation firm in response to the hostile bid. By contrast, both parties had proxy solicitors when CVRD made its hostile bid for Inco that same year. In another example, Potash Corp. did not hire a proxy solicitor in response to BHP Billiton's hostile bid in 2010, but that was a case in which government resistance doomed the offer, eventually withdrawn, almost from the start.
“The point is that hiring a proxy-solicitation company is becoming more or less the norm, so it's hard not to hire them if you have a contentious meeting coming up,” Woollcombe says. “People have concluded that not hiring them leaves you making your case to shareholders with one arm tied behind your back.”
So just what is it that proxy-solicitation companies do? “One of the key components is determining who the shareholders are and how to communicate with them,” Salmon says. “We do that by using all the resources available, including social media, old school media, or just an automated telephone campaign,” Salmon says.
But the job is as much about influencing as it is about ferretting out. “Our job is to communicate with shareholders when the company is not in a better position to do so,” Hall says.
In fact, proxy solicitors have evolved to become a strategic part of the deal team, be it on the issuer or dissident side. “Proxy solicitors are one of the best sources of feedback you can have in a proxy fight,” McDougall says. “They sit right there with the lawyers and accountants at the top-level meetings, and they often have the early leads on what the outcome of a particular vote might be.”
The vote, of course, is what it's all about. “The vote is the first thing on the agenda of almost every meeting during a proxy fight,” Hansell says.
Because they understand the shareholder base and communicate directly with them, proxy solicitors participate in such key decisions as which shareholders to target and how to target them, which communications should go to which groups of shareholders, and how to position communications to accord with shareholder thinking. “A good proxy solicitation company works closely with the public-relations advisors and investor-relations people by giving them a sense of what will resonate with shareholders,” Woollcombe says.
Proxy agents can do that because of their vast experience with the shareholder population and the sophisticated records they keep of what tends to resonate and what doesn't work. “We always have people doing comprehensive analyses of what institutional shareholders are likely to do in any given situation,” Hall says.
Proxy-solicitation firms are also front and centre in dealing with the powerful proxy-advisory firms like ISS and Glass, Lewis & Co., which have an enormous influence on how their institutional clients vote.
“Institutions simply don't have the staff to do the analysis on all the issues coming up for votes in respect of all the companies in which they invest,” explains Phil Moore in McCarthy's Toronto office. “So they hire the proxy-advisory companies to do the work, get their recommendations and for the most part follow them.”
Yet the influence of the proxy-advisory companies is growing still.
“Although the studies are inconclusive, they suggest that proxy-advisory companies' advice can be determinative on close votes by influencing shareholders other than their clients,” Moore says.
Once the soliciting and influencing is done and the shareholder has committed, the vagaries of the proxy process still have to be navigated to ensure that the vote gets in. “Lawyers aren't trained to understand how the back office of some fund works, and whom to talk to make sure the paperwork gets done properly and in a timely fashion after you've convinced the portfolio manager to vote your way,” Soliman notes. “It's a matter of translating the commitment into a vote, and it means you can't practise law in this area without a proxy-solicitation firm beside you.”
As it turns out, the relationship between issuers and proxy-solicitation agent and shareholder-services firms is still evolving. Again, it's the activists who are the catalysts. “There's a definite push on by institutional shareholder groups like CCGG for companies to find better ways to engage with shareholders than the traditional route of simply sending out documents that meet the legally prescribed requirements for disclosure,” McDougall says. “To the extent that management has built up a rapport with the shareholder base, they are more likely to have engendered the kind of goodwill that facilitates convincing shareholders that a proposed step is the correct one for the company.”
Proxy solicitation agents, of course, are ideal for this job. By all accounts, they're seizing on the opportunity. “We're interested in helping boards and senior management stay in tune with the shareholder base all year long, not just in the six or seven weeks before the annual meeting,” Keeling says. “Our approach has nothing to do with the prescribed legalities of disclosure. It's more of a rubber meets the road kind of thing that identifies the shareholders and keeps them involved.”
Keeling says that of the 4,000 public companies in Canada, only about 75 retain proxy-solicitation firms in the absence of a looming proxy bottle. “I expect that number to increase tenfold, to between 750 and 1,000 companies, in the next decade,” he says.
Mihkel Voore in Stikeman Elliott LLP's Toronto office also sees a growing role for shareholder-services providers. “These days companies are more likely to feel that they'll be challenged, and so they feel more strongly that they ought to be prepared for the challenges,” he says. “Proxy-solicitation companies can help by keeping tabs on the composition of the shareholder base, alerting issuers to issues that might arise, and keeping an eye on the horizon generally.”
That shouldn't be too hard: after all, the horizon looks most promising for the industry these days.
Julius Melnitzer is a freelance legal-affairs writer in Toronto.
Surely not. And as it turns out, you would be one of a growing number of companies and shareholder activists, large and small, who are finding that descending onto the battlefield of a proxy fight without a proxy solicitation agent is akin to the Duke of Wellington sending his troops to Waterloo without their weapons.
“The proxy system in North America is so byzantine that proxy solicitors can provide a lot of value because they can work the street and get to the real decision makers,” says Gordon Chambers, a partner in the Vancouver office of Lawson Lundell LLP.
In Canada, the guides you would most likely hire would be among Canada's four major proxy-solicitation and shareholder-services firms: Georgeson, Kingsdale Shareholder Services Inc., Laurel Hill Advisory Group LLC and Phoenix Advisory Partners. “As soon as there's a proxy battle on the horizon, we tell our clients that one of the most important decisions they make will be which proxy solicitation agent to hire,” says Andrew McDougall in Osler, Hoskin & Harcourt LLP's Toronto office.
But even if you're one of the few stakeholders in the public markets who would consider going it alone, you may still want to read on: you'll discover that dangers abide that you didn't even imagine existed. As Institutional Shareholder Services (ISS), the proxy-advisory company (a different animal from a proxy-solicitation firm, as explained later) that designed the flow chart, noted above, proxy voting is “a complex process with many steps, very few standards, and many different owners of information.”
Indeed, David Salmon, Laurel Hill's Senior Vice President, Western Canada, estimates that there are 1,200 steps in a shareholder meeting process. That alone should provide cause for caution.
So much so that a team of lawyers from Davies Ward Phillips & Vineberg LLP spent 16 months researching their now-landmark discussion paper titled The Quality of the Shareholder Vote in Canada. “In our experience with shareholder meetings, we encountered a variety of obstacles in making sure that votes are cast and counted, and we became concerned with the quality of the shareholder vote in Canada,” says Carol Hansell, who co-authored the paper, released in October 2010, with colleagues Mark Connelly, Michael Disney, Gillian Stacey, Tim Baron, Adam Fanaki and Richard Fridman.
While not directly addressing the growing role of proxy-solicitation agents, the paper is a guided tour through the pitfalls in the proxy voting system. “Carol's paper is the Bible on proxy voting,” says David Woollcombe in McCarthy Tétrault LLP's Toronto office.
Hansell and her colleagues list a number of features that make the system so complex. First
off, most retail and institutional investors hold their interest through intermediaries, so there is no direct relationship between issuers and investors. “Eighty per cent of Canadian companies have no idea who their major shareholders are,” says Wes Hall, Kingsdale's president and CEO;
The intermediaries hold shares in “fungible bulk,” which means that “the intermediary has a position in the aggregate of all the shares in which it holds an interest for clients” and each share is identical, so investors are unconcerned whether they hold one share as opposed to the other;
Canadian law allows investors to withhold their identity from the issuer. Investors, therefore, may be objecting beneficial owners (OBOs) who instruct intermediaries to protect their anonymity, or non-objecting beneficial owners (NOBOs);
Third-party service providers operate the proxy voting system. “Transfer agents and proxy solicitors act on behalf of issuers, proxy agents act on behalf of intermediaries and proxy advisors act on behalf of investors,” the authors of the Davies paper note;
The process features a multitude of parties and at least as many different systems and databases;
Communications between issuers and investors are not transparent.
What makes things even more complicated is the fact that the intervention of hedge funds and arbitrageurs change a company's shareholder profile significantly between the first offer and the date of the vote. M&A lawyers estimate that, whenever a deal is announced at a premium to market, some 10 to 30 per cent of the shareholder base bails out. Typically hedge funds and arbitrageurs come in and displace much of the institutional shareholder base.
“Even when you think you know your shareholder base well, things can change rapidly when an offer comes in,” says Daniella Dimitrov, President of DDimitrov Advisory Corp. and Vice-Chair of the Baffinland board when a hostile bid emerged. “Within three days, our stock had turned over at least once, and we had no idea who was doing the buying. So it was a good thing we had Phoenix and Glenn Keeling, a partner there, involved and at the table with the lawyers and bankers. Phoenix were the ones who kept us up to date on who the players were whenever the stock had a big turn.”
Finally, the jurisprudence on proxy solicitation is embryonic. “It's not even clear what constitutes a solicitation,” says Walied Soliman, a partner in the Toronto office of Norton Rose OR LLP. “And that's an issue that matters very much because dissidents trying to take over a company can't speak to more than 15 people without putting out a proxy circular.”
To be sure, the role of proxy-solicitation companies is not to remedy these concerns. It is to navigate them and make sure the vote gets out for their client, be that issuer or shareholder. But so long as the system maintains its complexity, the growth of the proxy-solicitation industry in Canada should come as no surprise.
Still, there's another factor at play here: the growth of shareholder activism over the past decade, a dynamic that has of late allowed minority shareholders of all stripes to set agendas for many corporations.
Although Canadian institutional investors for the most part sat on their hands in the wake of securities frauds like Bre-X and YBM Magnex in the late 1990s even as the US was embarking on a new era of shareholder activism, a handful of institutions did step up about a decade ago.
In 2001, for example, the Ontario Public Service Employees Union (OPSEU) filed a class action against Nortel Networks after the company's accounting scandal became public — but in the Southern District of New York, not in Canada. The Ontario Teachers' Pension Plan Board also filed in New York and eventually became co-lead plaintiff in the Nortel suits. The ensuing US$2.5-billion settlement was the largest recovery ever in a securities case involving a Canadian issuer.
When Teachers decided to go after Biovail Corp. in 2003, again its officials flew down to New York. The result? A US$138-million settlement, the second largest ever involving a Canadian plaintiff.
What also fuels shareholder activism is the pervasiveness of hedge funds in North American capital markets. There are almost 10,000 hedge funds in the US and they control over $1 trillion in assets. Some estimates suggest that hedge funds are responsible for 40 per cent of the volume on the New York Stock Exchange.
But as demonstrated during the high-profile battle over the share restructuring at Magna International and the recent outcry over Research In Motion Ltd.'s disappointing financial figures, it's not just in M&A transactions that shareholder activism has asserted itself. Organizations such as RiskMetrics and the Canadian Coalition for Good Governance (CCGG) are growing in size and becoming more vocal in their opposition to board decisions.
And while the CCGG has for the most part been focusing on the biggest companies on the S&P/TSX 60 index, it announced in June 2011 that it now has its sights set on the tier below. CCGG Chairman David Denison, who is also CEO of the Canada Pension Plan Investment Board (CPPIB), has made it clear that it will not hesitate to wage proxy battles where necessary to achieve its aim.
Indeed, the CPPIB has already implemented a test case by jointly filing a proxy resolution with British Columbia Investment Management Corp. asking European Goldfields Ltd. to adopt a majority voting policy. The resolution passed easily.
None of that surprises Chris Makuch, Georgeson's Vice-President, National Sales & Marketing. “Smaller transactions are now engaging proxy solicitors whereas five years ago only the big companies and the big deals engaged them,” he says.
As institutional investors abandon their traditional support of management for aggressive or quiet support of shareholder activism, setting the agenda can take many forms, including pressuring boards to enhance share value by paying special dividends, buying back stock, selling divisions, or even getting rid of management, as Ontario Teachers' Pension Plan did in the UK when it called for the ouster of Vodophone Chair John Bond. Activist shareholders have also been behind the “say on pay” movement, majority voting for directors and attacks on dual-share structures.
“Nobody cared about proxy-solicitation companies 15 or 16 years ago,” Keeling says. “But what became apparent around the turn of the century was that a company that didn't motivate its shareholder base to turn out in decent numbers at meetings would find itself in a heap of trouble. Then we started to get into more contested environments and things took off.”
Still, it's not the just the anecdotal evidence that speaks to the growing prevalence of proxy battles and the growing engagement of proxy-solicitation firms. The statistics are also compelling.
According to Proxy Contests in Canada — 2003-2011, a survey of proxy contests in a non-M&A context conducted by Kingsdale, 2003 saw only six proxy contests in Canada. By 2009, that number rose to 43, almost half as many as the cumulative total in the preceding six years.
The following year, 2010, saw a decline in proxy contests to 20 — which is perhaps not surprising considering the perceived improvement in the global economy. But by July 2011, there had already been some 15 proxy contests in Canada.
Kingsdale's figures also reveal that proxy agents were not retained on either side of more than half the 52 proxy battles in any year between 2003 and 2007; indeed, only 20 of the contests in that period featured a proxy-solicitation firm. By contrast, between 2008 and 2011, 73 of the 103 proxy battles listed by Kingsdale engaged proxy agents, and 38 involved proxy firms for both management and dissidents. In 2011, just one of 15 proxy fights lacked proxy solicitors. “This century has featured steady growth in our industry,” Salmon says.
But just what was at stake in these proxy battles and how did management fare? As it turns out, the stakes were high. Throughout, most of the battles were over board or partial board replacement. And, by way of tribute to the growing power of the shareholder activist movement, it turns out that management didn't do all that well on the playing field.
According to Kingsdale, management “won” 73 times, dissidents “won” 55 times, the matters “settled” on 23 occasions, and four cases ended in other ways. If the number of dissident wins and the matters settled are combined, and on the assumption that management had to make some concessions to settle, management's original position was comprised more than half the time.
None of this, of course, takes into account the stakes involved in M&A proxy battles resulting from hostile bids. Interestingly, both the target and the bidders retained proxy-solicitation firms when LSE and TMX announced their intention to merge, then were confronted by a hostile bid from the Maple consortium. The same was true when Nunavut Iron Ore and Arcelor Mittal made hostile bids earlier this year for Baffinland Iron Mines.
Not so long ago, however, when Xstrata PLC bid for Falconbridge Limited in 2006, Falconbridge didn't bother to retain a proxy-solicitation firm in response to the hostile bid. By contrast, both parties had proxy solicitors when CVRD made its hostile bid for Inco that same year. In another example, Potash Corp. did not hire a proxy solicitor in response to BHP Billiton's hostile bid in 2010, but that was a case in which government resistance doomed the offer, eventually withdrawn, almost from the start.
“The point is that hiring a proxy-solicitation company is becoming more or less the norm, so it's hard not to hire them if you have a contentious meeting coming up,” Woollcombe says. “People have concluded that not hiring them leaves you making your case to shareholders with one arm tied behind your back.”
So just what is it that proxy-solicitation companies do? “One of the key components is determining who the shareholders are and how to communicate with them,” Salmon says. “We do that by using all the resources available, including social media, old school media, or just an automated telephone campaign,” Salmon says.
But the job is as much about influencing as it is about ferretting out. “Our job is to communicate with shareholders when the company is not in a better position to do so,” Hall says.
In fact, proxy solicitors have evolved to become a strategic part of the deal team, be it on the issuer or dissident side. “Proxy solicitors are one of the best sources of feedback you can have in a proxy fight,” McDougall says. “They sit right there with the lawyers and accountants at the top-level meetings, and they often have the early leads on what the outcome of a particular vote might be.”
The vote, of course, is what it's all about. “The vote is the first thing on the agenda of almost every meeting during a proxy fight,” Hansell says.
Because they understand the shareholder base and communicate directly with them, proxy solicitors participate in such key decisions as which shareholders to target and how to target them, which communications should go to which groups of shareholders, and how to position communications to accord with shareholder thinking. “A good proxy solicitation company works closely with the public-relations advisors and investor-relations people by giving them a sense of what will resonate with shareholders,” Woollcombe says.
Proxy agents can do that because of their vast experience with the shareholder population and the sophisticated records they keep of what tends to resonate and what doesn't work. “We always have people doing comprehensive analyses of what institutional shareholders are likely to do in any given situation,” Hall says.
Proxy-solicitation firms are also front and centre in dealing with the powerful proxy-advisory firms like ISS and Glass, Lewis & Co., which have an enormous influence on how their institutional clients vote.
“Institutions simply don't have the staff to do the analysis on all the issues coming up for votes in respect of all the companies in which they invest,” explains Phil Moore in McCarthy's Toronto office. “So they hire the proxy-advisory companies to do the work, get their recommendations and for the most part follow them.”
Yet the influence of the proxy-advisory companies is growing still.
“Although the studies are inconclusive, they suggest that proxy-advisory companies' advice can be determinative on close votes by influencing shareholders other than their clients,” Moore says.
Once the soliciting and influencing is done and the shareholder has committed, the vagaries of the proxy process still have to be navigated to ensure that the vote gets in. “Lawyers aren't trained to understand how the back office of some fund works, and whom to talk to make sure the paperwork gets done properly and in a timely fashion after you've convinced the portfolio manager to vote your way,” Soliman notes. “It's a matter of translating the commitment into a vote, and it means you can't practise law in this area without a proxy-solicitation firm beside you.”
As it turns out, the relationship between issuers and proxy-solicitation agent and shareholder-services firms is still evolving. Again, it's the activists who are the catalysts. “There's a definite push on by institutional shareholder groups like CCGG for companies to find better ways to engage with shareholders than the traditional route of simply sending out documents that meet the legally prescribed requirements for disclosure,” McDougall says. “To the extent that management has built up a rapport with the shareholder base, they are more likely to have engendered the kind of goodwill that facilitates convincing shareholders that a proposed step is the correct one for the company.”
Proxy solicitation agents, of course, are ideal for this job. By all accounts, they're seizing on the opportunity. “We're interested in helping boards and senior management stay in tune with the shareholder base all year long, not just in the six or seven weeks before the annual meeting,” Keeling says. “Our approach has nothing to do with the prescribed legalities of disclosure. It's more of a rubber meets the road kind of thing that identifies the shareholders and keeps them involved.”
Keeling says that of the 4,000 public companies in Canada, only about 75 retain proxy-solicitation firms in the absence of a looming proxy bottle. “I expect that number to increase tenfold, to between 750 and 1,000 companies, in the next decade,” he says.
Mihkel Voore in Stikeman Elliott LLP's Toronto office also sees a growing role for shareholder-services providers. “These days companies are more likely to feel that they'll be challenged, and so they feel more strongly that they ought to be prepared for the challenges,” he says. “Proxy-solicitation companies can help by keeping tabs on the composition of the shareholder base, alerting issuers to issues that might arise, and keeping an eye on the horizon generally.”
That shouldn't be too hard: after all, the horizon looks most promising for the industry these days.
Julius Melnitzer is a freelance legal-affairs writer in Toronto.
