JASON FRANSON/The Globe and Mail
Orange Capital has seemingly squared the activism circle. With the latest development in the New York investment firm's dispute with the board of Partners Real Estate Investment Trust, Orange has found a way to stage a proxy fight by revealing its intentions, not hiding them.
Partners' trustees believe that they are in the best position to operate the REIT and therefore oppose Orange's proxy contest. Partners claims that Orange has run afoul of its advance notice bylaws. However, both policy and precedent run contrary to Partners' argument, making it likely that this proxy fight will be noteworthy both for its unique structure and for setting limits on how incumbents can defend against activists.
Shareholders can be ambivalent towards activist investors. While shareholders like it when activists reveal their intentions and share prices rise, shareholders who sell to an activist before the activist stages a proxy fight tend to be upset that they sold at a lower price than they would have if they'd known the buyer's identity.
Orange's proposal balances these considerations. Orange is offering to buy 10 per cent of Partners' outstanding units at a 7 per cent premium to the market price in exchange for the revocable proxy votes of everyone who tenders, whether those units are taken up or not. Orange will use the proxies to remove Partners' trustees (note: since Partners is a REIT, it has units instead of shares and trustees instead of directors).
Orange's plan is immensely appealing to unit holders because it compensates them for both their shares and for their support. Usually, it's costly for unit holders to come together, reach a consensus about how to act and then run an uncertain proxy contest to replace the directors. Activists circumvent this problem by acquiring shares on the open market. While this gives activists a toehold, that toehold must be disclosed at 10 per cent, and activists take the risk that the remaining 90 per cent of shareholders will disagree with their plan.
Orange's plan essentially lets unit holders pre-approve a new slate of trustees and still participate in the potential upside of the proxy contest. Under this model, Orange retains its incentive to stage a proxy fight (the 7 per cent premium does not capture the entire upside of a change in Partners' trustees) but without a corresponding problem with equity or transparency (Partners' unit holders will have complete information when they tender their shares to Orange and will receive a premium). Because the proxies remain revocable, Orange faces some risk that a successful tender offer won't result in a successful proxy challenge, but it's far less risk than in an old-style proxy fight.
This puts Partners in a bind. Its chief objection to Orange's proposal, that Orange is buying Partners for an insufficient control premium, is misguided. Orange is not buying control over Partners; the offer only affects one proxy vote and then unit holders regain control over their proxies. Orange is paying a premium for a more certain result. It's the price of co-ordination, not the price of control.
Partners thinks it may have found an answer to its problems in voting procedure. Last year, Partners enacted "advance notice bylaws." These bylaws are designed to protect against a surprise proxy fight by forcing activists to notify shareholders of their competing slate of directors at least 30 days before the election. This gives incumbent boards a chance to make their case to shareholders and prevents activists from taking advantage of low turnout at an annual meeting.
Partners claims that Orange failed to provide its slate of nominees for trustees within 30 days of the June 26th annual meeting. Though the meeting was postponed to July 15th, Partners' declaration of trust states that the postponement does not change the relevant notice date for submission of an activist's proxy solicitation, which means that Orange's original submission was made too late. Partners argues that this invalidates Orange's proxy solicitation.
Formally, Partners does seem to be correct. But "formally correct" is not usually a good answer in Canada, where our regulators look skeptically on legal maneuverings that affect shareholders' ability to exercise control over their shares. In the leading case on advance notice bylaws, Northern Minerals Investment Corp. v. Mundoro Capital Inc., the British Columbia Securities Commission upheld advance notice bylaws where the advance notice policy did not "influence or preclude" a proxy contest but served to "ensure that all shareholders [were] made aware that a proxy contest exists."
For Partners, this is not good. Mundoro suggests that regulators will examine advance notice bylaws based on the circumstances and ask whether bylaws are being used to stop the proxy fight. It is hard to see how Partners is not trying to do just that. Orange's proxy solicitation was given to unit holders 35 days before the new meeting, and Orange is not "hiding in the weeds," as the BCSC said in Mundoro, but openly offering shareholders a premium for the knowledge that shareholders support their plan. Moreover, the proxies remain revocable and limited to this meeting, so shareholders are not giving up long-term control. The bylaw gambit is a nice try by Partners, but not likely a winner.
This is good policy. The proxy fight is shareholder democracy at its finest and messiest, and our policies should encourage boards and activists to battle over who has the better plan for the company. Niggling bylaws and legal technicalities should not carry the day – shareholder democracy should. And it's even nicer for shareholders when that democracy comes with a 7 per cent premium.
Adrian Myers