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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 ...

For CP’s directors, Mr. Ackman’s challenge to their authority is a huge preoccupation at a time when the company is under enormous pressure to revitalize its sluggish operations, which are the least efficient of North America’s Big Six railways. The activist can be expected to escalate his criticisms of the company’s leadership as the proxy vote approaches in the spring and a debate is emerging over how the board should respond.

Len Racioppo, president of Montreal-based Jarislowsky Fraser Ltd., which does not currently own CP shares, said the railway is being challenged because shareholders are “extremely frustrated” with a company that is underperforming.

“Everyone has to squeeze more to generate returns. Why should companies be treated any differently, and why should boards be any different? You’re seeing it everywhere,” he said.

Alan Radlo, a Boston-based portfolio manager with CI Financial, which has a small stake in CP, counters that it is a “disgrace” that the board has extended special privileges to Mr. Ackman by meeting with him privately and discussing his proposals for management and board changes.

“There shouldn’t be favouritism with one shareholder. I definitely have a problem with the company showing privilege to this activist,” Mr. Radlo said. “What about other shareholders?”

The activist investor

Few would have guessed 10 weeks ago that war would break out so quickly between CP and its largest shareholder. From the beginning, CP’s board had raced to put out the welcome mat to an investor whose lucrative bets against subprime mortgage insurers in the United States had seen him lionized in the Academy-award winning film Inside Job.

The combined impact of Mr. Ackman’s big stake, influence and an exuberant market reaction that sparked a 7 per cent increase in CP’s stock since Oct. 28 put enormous pressure on the board to respond to him after his hedge fund, Pershing Square Capital Management, announced its stake on Oct. 28. Mr. Ackman had requested a meeting with CP’s directors, but typically boards don’t meet with minority shareholders, and certainly not so soon after their investment.

There is nothing typical, however, about Mr. Ackman. Since he founded Pershing Square in 2003, he has profited from most of his 23 turnaround targets by agitating, embarrassing and, on two occasions, mustering enough shareholder support to vote out intransigent directors and executives.

By opening the door to him, the directors hoped they could forge a constructive relationship with the investor and avoid public confrontations, people familiar with the company said.

At first it looked like the peace process would work. On Nov. 2, five days after Pershing Square’s announcement, Mr. Cleghorn, Mr. Green and a handful of their advisers welcomed the activist and one of his partners, Paul Hilal, at a small airport terminal in Montreal where Mr. Ackman’s private jet had just arrived from New York.

The meeting began with Mr. Ackman presenting a book to Mr. Cleghorn that outlined his proposals for change at CP. The book was thick with data, but the only passage that really mattered was the blockbuster proposal to hire rail legend Hunter Harrison as the next CEO. Mr. Harrison, the retired former chief of CP’s archrival CN, was presented as the solution to the company’s problems. He could transform CP the same way he had transformed CN into North America’s most efficient railway.

Sitting next to Mr. Cleghorn while Mr. Ackman sang Mr. Harrison’s praises was Mr. Green, who was facing for the first time the prospect of losing his job to a man he had been locked in competition with for much of the past decade. According to people familiar with the session, Mr. Green, a CP lifer, said almost nothing.

When the meeting ended, Mr. Cleghorn promised to take Mr. Ackman’s book of ideas back to the board. In exchange, the student of military history gave Mr. Ackman something to read on his flight home: a history of the American Civil War.

What happened in the two months following the Montreal meeting is a subject of debate. Sources close to CP say the company moved at lightning speed to accommodate Mr. Ackman. In early December, CP’s governance committee invited Mr. Ackman to meet with them in Calgary so they could review him as a candidate for the board.

The board, Mr. Cleghorn said in an interview this week, agreed to offer Mr. Ackman a director’s seat to engage him in “a constructive dialogue” at the board level. The only proviso was he had to sign “fairly normal” legal agreements.

Fairly normal agreements, Mr. Ackman discovered, included a document known as a standstill agreement. By signing it, he would be effectively prohibited from launching a proxy battle. It was a non-starter. His other aggravation was that the board had rejected his second candidate for the board, his partner Mr. Hilal, who had flown with him to Calgary but was not included in the boardroom session.

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