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John Cleghorn is the chairman of Canadian Pacific Railway and a former chief executive officer of Royal Bank of Canada. (Will Lew for The Globe and Mail)
John Cleghorn is the chairman of Canadian Pacific Railway and a former chief executive officer of Royal Bank of Canada. (Will Lew for The Globe and Mail)

The story behind the all-out war to control CP Add to ...

There comes a moment in every corporate battle when the first cannon is fired.

In the unfolding power struggle at Canadian Pacific Railway Ltd. , that moment came at 7:22 a.m. on Jan. 4, when the send button was clicked on an e-mail, lighting a fuse from New York to Toronto.

The general holding the match was Bill Ackman, a brash 45-year-old activist investor who has made a $1.4-billion bet on the railway, buying a 14.2 per cent stake in the belief that it will give him enough clout to push for a management overhaul and raise its stock price.

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The target in Mr. Ackman’s crosshairs was John Cleghorn, the 70-year-old chairman of CP and a former chief executive officer of Royal Bank of Canada. A sombre and courtly business veteran, Mr. Cleghorn, personifies the buttoned-down reserve of the Canadian establishment.

It is doubtful Mr. Cleghorn, a military history buff, had ever received a message like the one that was fired into his inbox that morning. Under the subject line “War and Peace,” Mr. Ackman had typed out a lengthy e-mail, obtained by The Globe and Mail, that warned his “border skirmish” with the company would turn into “a nuclear winter” if his demands for a new CEO and two seats on the board were not met.

His atom bomb, he explained, would be a proxy battle for new directors that “would not go well” for the board and CEO Fred Green because of their “very poor” track record.

“We will take the largest public hall available in Toronto and we will make a presentation to the shareholders and the public ... about management and board failures of the last ten years at CP. We will examine management and the board’s track record and history.”

Mr. Ackman, a sharp-elbowed investor who describes himself as a “direct” communicator, hoped his e-mail would prod into action a board that he believed was moving “too slowly” in response to his demands.

To Mr. Cleghorn and the startled CP directors with whom he shared the e-mail, however, the message was an act of hostility that challenged the authority of a board stacked with leading business figures such as Suncor Energy Inc’s Rick George, former deputy prime minister John Manley and grain merchant Hartley Richardson, a fifth generation descendent of one of Canada’s oldest business families.

According to people familiar with the company, the directors were outraged by the e-mail’s tone and demands. Mr. Cleghorn and his directors believed they had bent over backwards to meet and discuss Mr. Ackman’s proposals. They saw the e-mail as an attempt by Mr. Ackman, a minority shareholder, to usurp the board’s authority to hire and fire a CEO. They quickly decided to break off discussions with their largest shareholder; peace would not be accepted on Mr. Ackman’s terms.

On Monday, five days after Mr. Ackman’s e-mail, the board steered CP towards a head-on collision with the investor. They publicly dismissed his proposed hiring of former Canadian National Railway Co. boss Hunter Harrison as “detrimental” to the company’s strategy. Hours later, Mr. Ackman declared war, announcing a proxy contest to elect new directors who backed his plan to replace Mr. Green.

Mr. Ackman said in an interview that that he is “sorry” his e-mail “offended” CP’s directors, but his intention was to alert them in clear terms that their inaction was moving the two sides toward a confrontation.

“I was laying out clearly and directly what was going to happen.” (Mr. Ackman also said he was “disappointed that excerpts of a private communication with Mr. Cleghorn has been released to the press.”)

What happens next will likely be an epic tug of war over who gets to drive what has become a runaway train. The contest at CP has the potential to reshape a historic national railway, under the hard-charging leadership of Mr. Harrison, who Mr. Ackman wants to air drop into CP. It could also further shift the balance of boardroom power away from directors who are seeing their authority increasingly challenged by powerful pension and hedge funds.

“We are walking down a path where power is slipping from boards to shareholders and we should ask ourselves, ‘What are the implications?’ ” said Ed Waitzer, a corporate lawyer with Stikeman Elliott LLP and former board adviser to BCE Inc., which saw its management overhauled after lengthy brawl with the Ontario Teachers’ Pension Plan.

But for corporate directors, the muscular tactics of investors like Mr. Ackman are making it harder to say no to shareholder demands.

Jon Grant, lead director of CCL Industries Inc. and a veteran of 15 boards, said the “polite” world of Canadian boards is being rapidly altered by global influences, and as a result boards are at times “intimidated” by investor pressure.

“One of the things we forget as directors is that directors are responsible to the corporation first and to shareholders second,” he said.

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