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Fund manager Normand Lamarche of Front Street Capital (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
Fund manager Normand Lamarche of Front Street Capital (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Shareholder uprising could be costly for Front Street Capital Add to ...

Front Street Capital is squaring off against an activist shareholder seeking to terminate its management agreement to run Ceres Global Ag Corp.

The dispute could be costly for Front Street, a medium-sized Bay Street investment firm that has received about $14.7-million from Ceres since its inception in 2007 through a hedge-fund like management fee structure.

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The action marks another potential bare knuckled brawl between U.S. activist investors and a Canadian company over claims of poor performance or corporate direction. Another notable dispute currently under way is between Agrium Inc. and its largest shareholder, Jana Partners, over splitting the retail operations of the giant fertilizer company, and it follows last year’s corporate upset of Canadian Pacific Railway by anther U.S. activist.

The activist in this case is VN Capital Management, a New York-based money manager that specializes in small capitalization stocks. It holds 7.2 per cent of Ceres, an operator of wheat belt grain terminals and part owner of a short haul railway line in Saskatchewan.

VN Capital has asked for a special shareholders meeting to vote on cancelling the management agreement. Ceres has responded in a letter to VN Capital saying it believes shareholders cannot terminate the management agreement unless the move is first authorized by the company’s directors, leading VN Capital to threaten to seek another meeting to turf out the Ceres board, headed by Gary Selke, who is also president and CEO of Front Street.

Mr. Selke said in a statement that Front Street agrees that Ceres should eventually have a traditional management in place, rather than have management provided through a fee arrangement, but doesn’t want it to happen right away. “We believe Ceres’ businesses should be further developed before any change is initiated,” he said.

Ceres said Friday that it has established a special committee of independent directors to respond to VN Capital and is urging shareholders to take no action on the request for a meeting until it completes its review.

The fees being paid by Ceres “are not justified” by Front Street’s “lack of performance” in overseeing the company, says James Vanasek, a principal at VN Capital, who calls the arrangement “a very lucrative long term contract that really was not in the best interests of Ceres shareholders.”

By his estimate, Ceres has cumulative losses of $7.2-million since its formation as an company designed to give investors exposure to the booming agricultural sector. Under the agreement, Front Street receives an annual fee equal to 2 per cent of Ceres’ net asset value, but also is eligible to receive 20 per cent of any investment gains in the value of Ceres’ holdings. Given the weak performance, no such payments have been made.

Such fee arrangements are typical at high-performing hedge funds, but are rare for stodgy businesses like running grain terminals.

Mr. Vanasek contends that the management agreement is depressing Ceres’ stock price and is one reason it trades at a discount of VN Capital’s estimate of its intrinsic value around $10 a share. He says he approached Ceres privately over the past two years to discuss ending the agreement and have Ceres operate with a traditional management structure, but got nowhere. “Our patience has run out,” he says.

Since going public with the plan to end the management agreement, Mr. Vanasek says he’s been approached by “five or six other significant shareholders, all of whom have been very supportive of what we’re doing.”

About 20 per cent of the company is owned by principals of Front Street.

 
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