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Shareholder activism not going away

Incidents are down but rising commodity prices may spur more proxy fights
By Fred Pletcher
February 17 2017 issue

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Compared to the record-setting year of 2015, shareholder activism in Canada in 2016 returned to lower historic levels. Interestingly, Canadian issuers prevailed in the majority of proxy contests against shareholder activists last year. This contrasts with a higher success rate for activists in the United States, and in previous years in Canada. Overall, these results suggest that corporate Canada has become more prepared in responding to activists, particularly through the adoption of advance notice bylaws and policies.

So, should Canadian boards and their counsel rest easy when it comes to shareholder activism in 2017? Probably not.

First, shareholder activism is not going away. There are approximately 550 activist funds around the world with US$180 billion in assets under management, compared to just US$51 billion five years ago. Activism is now an established asset class.

Secondly, a potential influx of U.S. activists may be on their way to Canada, as the activist space south of the border becomes crowded and the number of activist-susceptible U.S. public companies dwindle. Even private equity firms, which previously focused on distressed and undervalued situations, have begun to adopt activist tactics, as seen from Catalyst Capital Group’s opposing Corus’ acquisition of Shaw Media in 2016.

To some extent, Canadian public companies have been shielded from activism over the last few years as low commodities prices eroded the activists’ opportunities for producing the median alpha-adjusted 20 per cent returns they typically seek. As Brook Papau, analyst at ITG Investment Research stated: “Your theory of what is right or wrong with a company, and what needs to change, can all be technically sound, but it can be blown away by a commodity price change and it’s out of your control.” Accordingly, a rebound in commodity prices may be all it takes to spark increased activist scrutiny of Canadian companies.

Thirdly, new rules adopted in May 2016 have made it more difficult for potential strategic acquirers to obtain control of public company targets through takeover bids. Such predatory parties may potentially turn to the use of proxy fights in place of the traditional hostile bid route.

Finally, activists continued to be successful in Canada in 2016 when they employed time-proven, discrete strategies. For example, activists seeking to elect minority, rather than majority, board slates (called “short slates”) won the majority of their proxy fights in 2016. Short slates allow activists to take the position that they merely want to contribute new strategies to a target, rather than completely overhaul its business model. This approach has proven popular with retail and institutional shareholders, who are more welcoming of a minor board shake-up rather than a full coup d’état. Similarly, where a former founder or CEO engaged in activism in 2016, it also tended to be successful — as previous management brings credibility to the activist cause, as well as familiarity and relationships with the target’s shareholders. The high water mark for such activism in 2016 was former CEO Phil Mulacek’s temporary derailing Exxon’s $2.5 billion acquisition of InterOil Corporation.

Does such shareholder activism represent an existential threat to corporate Canada? Generally, no; as most activism succeeds or fails depending on whether it can demonstrate a reasonable prospect for higher returns for shareholders. But, Canadian boards and shareholders should be alert to the fact that some activists’ interests are decidedly not aligned with shareholders. For example, short seller funds have begun adopting activist strategies in Canada — but these funds reap their returns from driving down share prices. Similarly, bond-based activists will often employ strategies that transfer value from the equity holders’ to the lenders’ column on the balance sheet.

Short seller and bond-based activists employ “scorched earth” tactics with much greater frequency than other activists, which increases the time, expense and distraction for target issuers. In Raging River’s unsuccessful 2016 proxy fight against Taseko Mines Limited, for example, the activists: falsely alleged that a dilutive equity financing was being pursued by management; wrongfully accused directors and officers of insider trading (allegations that were not pursued by securities regulators); launched an unsuccessful oppression action; threatened (but, did not follow through on) defamation litigation; and failed to publicly disclose their bondholdings in Taseko. At the end of the day, Raging River’s overly aggressive tactics and misleading communications caught up with it, causing leading proxy advisory firms ISS and Glass Lewis to recommend that institutional investors support management. But the cost of beating back these activists? $4.5 million, a hefty price.

Lessons that issuers can take away from Taseko’s successful defence against predatory activism include: (i) responding with beneficial corporate governance changes; (ii) holding activists to account for inaccurate public disclosure; (iii) clearly contrasting the issuer’s long-term strategy with the activists; and (iv) communicating frequently with major shareholders and proxy advisory firms. Shareholder activism needn’t be a death knell for Canadian issuers.

Fred Pletcher is a partner at Borden Ladner Gervais LLP.

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