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A grain harvest just north of Calgary near the town of Balzac.

LARRY MacDOUGAL/The Globe and Mail

Directors of Ceres Global Ag Corp. are coming out swinging against an activist U.S. investor that is challenging the company's management agreement with Bay Street financial firm Front Street Capital.

The U.S. investor, VN Capital Management, has called a special shareholders' meeting to be held July 24 to vote on its resolution, cancelling what it contends is a lucrative deal allowing Front Street to manage Ceres in return for a fee arrangement worth about $3-million a year that is similar to those used by hedge funds.

VN Capital estimates that senior executives could be hired directly by Ceres for about $1-million a year, producing a cost saving that would give the company's shares a major boost.

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But Ceres, in its management circular, says it has a legal opinion from Torys LLP indicating that the shareholders' vote isn't binding on directors, who are headed by chairman Gary Selke, Front Street's president.

"The board considers the resolutions proposed by VN Capital for the meeting to be advisory in nature," the circular said.

The rising tensions between VN Capital and Ceres Global, a grain elevator and short-line railway operator, are the latest outbreak of fighting between a Canadian board of directors and shareholders over corporate governance issues.

The board circular says the only way to end the Front Street deal is for directors to first vote it down, and then have shareholders ratify their decision.

"The board has not resolved to terminate the management agreement and is of the view that doing so would not be in the best interests of Ceres or its shareholders," the circular said.

But the position was rejected by VN Capital. "Simply put, we think their view is wrong and it requires a very twisted legal reasoning to justify it," said James Vanasek, principal at the New York-based money manager, which specializes in small-capitalization value investments.

Mr. Vanasek said polling he has done of other major shareholders leads him to believe he'll win the vote, which will set the stage for a showdown with Ceres directors over the management contract.

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If the board ignores the resolution, VN Capital will "call for the ouster of the board of directors, since clearly, they are showing they are favouring Front Street at the expense of the other shareholders of this company," Mr. Vanasek said in an interview.

Ceres was set up in 2007 through an initial public offering as a stock-market-traded security overseen by Front Street to give investors exposure to the then-hot agricultural sector. Front Street has a 20-per-cent stake and the circular says the large holding means its interests are aligned with other owners.

The shares were caught in the market panic and have been languished well below their $12 issue price, even though Ceres has been able to buy U.S. grain elevators at attractive prices. It has also acquired a 25-per-cent interest in a short-haul rail line in Saskatchewan in 2011. The value of the rail line subsequently rose because of the use of railways to move crude oil.

VN Capital owns about 6.8 per cent of Ceres and says the fee arrangement is a prime reason the shares are trading below its estimate of the company's breakup value.

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