The practice of offering incentives to brokers to make recommendations to their clients to vote on one side or another in proxy battles and takeover votes is an undesirable one. It is not vote-buying, but it will tend to distort financial adviser-investor relationships and sooner or later to weaken trust.
A current instance is the competition between Agrium Inc.’s proposed slate of directors and those being advanced by a hedge fund, Jana Partners LLC. While Jana’s mailing to Agrium shareholders explicitly raises the possibility of forming a “a soliciting dealer,” it is criticizing Agrium for offering brokers 25 cents a share, if their clients support the management slate. For each broker, there is a potential of $1,500 in “customary fees” for each retail client – if and only if the management is victorious.
The rationale proffered is that otherwise advisers might not find the time to expressing their opinions to their clients.
This practice is not permitted in the United States. Because it is not prohibited in Canada, it can become hard to refrain from engaging in it, in a hard-fought proxy campaign. Moreover, the price of such incentives may be going up; for example, in April, 2012, EnerCare Inc. offered 5 cents in a proxy battle with another hedge fund, Octavian Advisors LP.
If the stakes are indeed rising, then the temptations to brokers are climbing too; it is time to forbid this soliciting. At the very least, a clear and unambiguous press release should be required.
Some legal maxims express ethical principles rather than hard-and-fast law. One centuries-old aphorism says, “What cannot be done directly cannot be done indirectly.” If management is not content to make its case directly, something is amiss. It is not worth undermining confidence in Canada’s financial advisers, for the sake of a board’s incumbency.