Proxy Contests

Shareholder activist tactics are evolving, from Twitter to golden leashes to vote buying

Shareholder activism has put down roots in Canada. In fact, Eric Rosenfeld of New York’s Crescendo Partners has referred to this country as an activist investor’s paradise.

From him, that’s a compliment.

A variety of things make us a shareholder-friendly jurisdiction, says Rosenfeld, the fund’s chairman and CEO. It ranges from the willingness of provincial regulators to cease trade poison pills to the ease with which activist investors can force a board vote.

For example, anyone with 5 per cent of the company’s shares can requisition a shareholder meeting, he recently said, which means “within three or four months the whole board’s going to be up for election. That gives the shareholders, and activists in particular, tremendous power.”

And Americans have not been shy about using it.

Rosenfeld says Canadians are “very nice” people, maybe too nice in his view. He says much of the activism here has been driven by “mean Americans.”

He was presumably referring to Bill Ackman, the CEO of Pershing Square Capital Management who took on CP Rail, billionaire investor Carl Icahn who tangoed with Talisman Energy Inc., and Jana Partners LLC, the US hedge fund that did battle with Agrium Inc.

Garth Girvan, a senior partner at McCarthy Tétrault LLP, agrees that certain elements of the Canadian regime do make it easier for activists. As for some kind of US activist invasion, he doesn’t think it’s a trend that should have Canadians concerned.

“Although American activists have been catalysts for change, to the extent that they effect change it often inures to the benefit of the entire shareholder base, and theoretically to the business community and the economy as a whole,” Girvan says.

“Look at CP. The catalyst was an American but the company appears to have gone in a different direction at Ackman’s urging and that’s created huge shareholder value.”

If you want to talk about American activists driving change, there’s no better case in point than Carl Icahn.

When he turned his attention to Talisman last year, his actions changed proxy battles forever — in Canada and everywhere else.

Social Media

Once Icahn had acquired a large enough position in the Calgary energy company and was ready to approach management about board representation, he tweeted the news.

With the push of a button, he threw out the rulebook for running proxy campaigns in Canada.

This was not a legendary 77-year-old investor co-opting the younger generation’s micro-blogging habits; this was a wily campaigner using social media to perform alchemy on Talisman’s shareholder base.

The tweet instantly got the attention of event-driven investors who bought Talisman in anticipation Icahn would push for a corporate overhaul.

 “People will follow a Carl Icahn or a Bill Ackman into a stock in anticipation there will be an event such as a new CEO, a sale or a new strategy,” says Orestes Pasparakis of Norton Rose Fulbright Canada LLP.

That often results in 20 to 30 per cent of the shares changing hands within a week or two, says Pasparakis, co-chair of his firm’s Canadian special situations team.

The new shareholders can be counted on to back any coming board challenge at much higher levels than those who just bailed out.

So, from an activist’s perspective, if they accumulate 10 per cent of the company’s stock themselves and have another 20 per cent of aggressive like-minded investors who follow them into the stock, he says, “all of a sudden you’re at 30 per cent — which gives you a good base from which to pursue a board change.”

In the meantime, all the buying usually sends the share price up, which makes the activist look even better.

“It makes the activist look like the smart money. At the same time it also makes them some money right up front, so it provides them with a financial cushion.

“And people suddenly want to know what the board is going to do in the face of these criticisms. They start scrutinizing the company and looking at why the activist is coming in, what changes ought to be made and what the upside is. That puts tremendous pressure on the board.”

Pasparakis says the question of whether to go public right up front using social media and the Internet has quickly become “the dominant strategic decision in a campaign.”

But it’s not the only one.

Golden Leashes

Another tactical decision that activists have had to make is whether to use golden leashes.

The issue was thrust into the spotlight last year in the fight between Agrium and New York-based Jana, its largest shareholder. When the fertilizer maker rejected Jana’s suggestion the company spin off its retail business to boost shareholder returns, Jana responded by putting forward its own independent directors to serve on Agrium’s board.

Jana agreed to pay its nominees a percentage of its profit on Agrium over a three-year period, provided they won a board spot and that the share price went up. That private compensation would be in addition to the amount the company pays all its directors for their services.

Critics of the arrangement were outraged, saying it would keep the Jana directors on “golden leashes.” Jana countered that its nominees would only stand to gain “to the extent that all shareholders gain.” 

The Canadian Coalition for Good Governance weighed in, warning golden leashes create a divergence of interests on the board.

Stephen Erlichman, the coalition’s executive director and a partner at Fasken Martineau DuMoulin LLP, says the problem with golden leashes, to use this case as an example, is that they would give the Jana-backed directors the incentive to make decisions with at most a three-year horizon, and create internal conflict between “what the Jana-nominated director might do to get that compensation, versus what might be in the best interests of the company over the given time frame.

“It creates a Balkanized, dysfunctional board where some directors can potentially get millions of dollars each and other directors are going to get just whatever the directors’ fees are.”

Carol Hansell of Hansell LLP, one of Canada’s leading governance experts, says golden leashes were designed as a way to encourage qualified directors to stand with dissidents and fight.

Board fights in Canada used to be waged behind closed doors. Not any more. Today dissident nominees have to prepare themselves for a US-style rough and tumble – and personal – battering in the media. It’s a change Hansell finds disturbing.

“I don’t think it’s so much a concern when people are taking shots at the quality of the strategy or governance, but when they start taking personal shots at the individual directors – nothing to do with past board performance – that’s using the go-negative style you see in political campaigns and applying it to proxy battles in a corporate context. That is really concerning.”

Hansell says there are arguments for why golden leashes are a good idea but, with heated pushback on both sides of the border, says she’d be surprised if anyone tries to use them again this year.

 “The community has spoken and said it’s just not acceptable.”

Golden leashes weren’t the only controversy resulting from the Jana-Agrium board fight (which Jana lost, by the way). It also opened up a whole new debate on vote buying.

Vote Buying

In the heat of last year’s campaign, Jana accused Agrium of offering to pay investment advisors 25 cents a share, up to $1,500, if their clients voted their shares in favour of existing directors — provided Agrium’s slate won the contested board election.

Vote buying, or the more neutral term of dealer solicitation, raises eyebrows because it can be viewed as directors using the company’s cash to entrench themselves.

The practice of paying brokers to get their clients to vote in a proxy contest or M&A has been around a long time but the incentive was traditionally offered to make sure shares were voted — not tied to them being voted one way or the other, says Kathleen Keller-Hobson, an M&A partner at Gowling Lafleur Henderson LLP.

She believes the way it was used by Agrium raises ethical questions and “there is a fairly prevalent view that it is not appropriate.” Judging from the buzz in governance circles, she says, she is doubtful it will be used again soon.

“I think people would tread more carefully next time. Jana wasn’t happy about it and I wonder whether one wouldn’t bring an oppression action on the basis that that is not appropriate from the corporation’s view, not a proper use of corporate funds.”

But Keith Chatwin, a partner at Stikeman Elliott LLP, is not so sure. He says it comes back to the business judgment of the board.

“If the board determines the circumstances justify whatever legal means are necessary to ensure that the direction of the company they’ve charted is adhered to, then that’s within their discretion to determine.

“If they think certain shareholders don’t understand the value proposition that the board has put in place and that management is executing, and they think they can drive the vote more powerfully through an economic incentive, then perhaps they think this is the right way to go.”

He also says what Agrium did was not buying votes in the truest sense.

“The company’s not paying shareholders to tender their shares. You’re paying the advisor to make the effort to communicate with the individual on whose behalf they hold the shares, to convince them to vote. Might they be more persuasive about the virtues of existing management if they receive an incentive to be so? Perhaps. It does raise potential conflict concerns. But from a board perspective, I don’t know if that would necessarily compromise the discharge of my duties to the corporation.”

One thing most practitioners agree on: Canada’s growing shareholder activism movement is not likely to fade away any time soon.

“There is money flowing into activist funds like never before,” says Hansell. “The activist funds, for whatever reason, are getting better performance than other funds. So the phenomenon of the activist is going to continue.”

Sandra Rubin is a freelance legal affairs writer.