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Bill Ackman is the founder and chief executive officer of Pershing Square Capital Management LP. (EDUARDO MUNOZ/EDUARDO MUNOZ/REUTERS)
Bill Ackman is the founder and chief executive officer of Pershing Square Capital Management LP. (EDUARDO MUNOZ/EDUARDO MUNOZ/REUTERS)

The giant killer: Inside CP's overthrow Add to ...

The moment Mr. Ackman put forward Mr. Harrison’s name proved to be a critical one; arguably, it was what pushed the two sides toward war.

According to people close to CP, the board was unanimously opposed to Mr. Harrison. The hard-driving cost cutter may have transformed CN into of North America’s top-performing railways, but his tactics had so alienated customers that it prompted the federal government to hold a public inquiry into customer complaints that proved to be embarrassing for both railways.

The harder Mr. Ackman pushed for the railway veteran, the deeper CP’s board dug in its heels, a rift that ultimately triggered a very public and angry exchange of accusations that culminated in Pershing Square launching a proxy battle to replace a minority of directors.

At the time, sources close to CP say, the board believed it would be able to convince its major shareholders that Mr. Ackman’s crusade for Mr. Harrison would be destructive for a railway that was just emerging from a dark tunnel with improved performance.

What the board appears to have misunderstood is that a number of shareholders had already made up their minds about Fred Green and the board.

Around the time Mr. Ackman began accumulating his stake in late September, CP’s stock had hit a two-year low on the Toronto Stock Exchange. The stock had been sliding for months because shareholders, tired of waiting for a turnaround at the laggard railway, were voting with their feet by selling the company’s stock.

“The job of the board is to hold management accountable,” said Mark Wiseman, the incoming CEO of the Canada Pension Plan Investment Board (CPPIB). “If they are not doing that, at some point people will sell and sell and sell until it makes sense for someone to get actively involved.”

By the time Mr. Ackman began publicly campaigning to replace Mr. Green and several directors, CP’s stock was cresting $70. The more than 60 per cent runup in the stock price gave him a huge head start with shareholders – some of whom realized that if they rejected his plan, the stock would plummet again – that CP could never recover from.

As the May 17 proxy vote loomed, some major shareholders urged the company to strike a settlement with Mr. Ackman, arguing that the conflict distracted CP from the difficult job of improving its performance.

For reasons that are still something of a mystery, the railway’s board seemed unable to agree to terms among themselves or with Mr. Ackman. People close to the company said some directors believed they were taking the high road, marching to likely defeat, because they were convinced Mr. Harrison was the wrong choice. Others said they saw no room for negotiating with Mr. Ackman because there was no sign that he was willing to back down from Mr. Harrison or his expanded slate of seven directors.

As the directors stood firm, the bad news piled up. First, three leading proxy advisers took the rare step of recommending that investors vote for all of Pershing’s proposed directors and withdraw their votes for such old guard CP directors as Mr. Cleghorn and Mr. Phelps. Then Teachers and the CPPIB voiced their displeasure by announcing they, too, were backing the Pershing group.

Several days before the annual meeting in Calgary, sources say representatives for Pershing and CP tested each other’s appetite for peace talks, but these overtures got very little traction. The board’s resolve appears to have wavered only this week as the majority of shareholders were submitting their votes ahead of Thursday’s annual meeting.

Faced with a landslide victory for Mr. Ackman’s slate of dissidents that left long-standing directors such as Mr. Cleghorn and Mr. Phelps with insufficient votes to be re-elected, the board dispatched their lawyers – Bob Schumer, a Wall Street deal maker, and Bill Orr, a partner at Fasken Martineau DuMoulin LLP – to take their peace terms to Pershing’s legal adviser, Patricia Olasker, late Wednesday night.

The dramatic last-minute settlement is still being digested in a business community that is not accustomed to seeing major business figures vanquished so publicly.

“It is unbelievable, stunning,” said John McNeil, former chairman of Sun Life Assurance Co. of Canada who retired as a CP director in 2001. A long-time CP shareholder, Mr. McNeil voted for all of the board nominees backed by CP. He made a point of voting against Mr. Ackman.

“The big institutions have kicked CP’s management in the teeth.”

Click here to see the final results of Thursday's vote

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