Activist investors are on a two-year cold streak, losing all of the 14 proxy fights brought by dissident shareholders in Canadian companies since January, 2015, after historically winning the majority of these boardroom showdowns.
Governance experts say the change in the landscape reflects growing sophistication on the part of management teams and corporate boards, rather than any loss of clout for institutional investors.
Law firm Fasken Martineau recently published its annual study of proxy contests and found that from 2015 to this month, institutional investors who used proxy contests in an attempt to toss out corporate boards or change management "were wholly unsuccessful in their efforts." There were 16 proxy contests, and the only successful campaigns were two waged by company founders.
The vast majority of recent failed dissident campaigns took place at small companies, typically with market capitalizations of less than $50-million. The notable exception is the unsuccessful proxy fight waged by activist investor Catalyst Capital Group Inc. against Corus Entertainment Inc. over its agreement to buy media assets from parent Shaw Communications Inc.
Until recently, the majority of showdowns between activists and management resulted in victory for the outsiders. Fasken lawyers looked at 117 proxy contests from 2008 to 2013, and found the dissidents won a full or partial victory 53 per cent of the time.
In 2013, in the wake of activist investor Pershing Square's successful campaign against Canadian Pacific Railway Ltd., Toronto-based Fasken partners Aaron Atkinson and Bradley Freelan said in a report: "Proxy contests, not long ago a relatively rare phenomenon in Canada, have become an increasingly familiar feature of the Canadian corporate landscape and, given the success that a number of activist shareholders have achieved to date, might be expected to increase in frequency."
That prediction proved off the mark, as the number of proxy contests fell off, and the activists began striking out every time they went to bat. Mr. Atkinson and Mr. Freelan looked at how dissident campaigns evolved, and in a subsequent report that came out last year, they concluded that the reason for the shift was "a softening of the historic tendency of management to fight to the bitter end. ... Management is improving in its ability to read shareholder sentiment in a more timely and accurate fashion."
Activist investors typically begin a campaign by discreetly approaching management and boards to make their case for change. Proxy fights are expensive and time-consuming – costs for lawyers and proxy advisers can run to more than $1-million – and used only as a last resort. After high-profile battles such as CP Rail – which resulted in new board members and the arrival of CEO Hunter Harrison, then a striking improvement in performance and the stock price – executives and directors are more open to input, and to sometimes radical change.
For example, in early August, activist investor Crescendo Partners published a letter urging Mississauga-based software company Redknee Solutions Inc. to put itself up for sale, and last Wednesday the company announced it had begun a strategic review that includes its possible sale.
When boards and management teams do decide to face off with activists in a proxy contest, they now do so from a position of strength, confident that their point of view will win the support of shareholders. In the most recent Fasken report. Mr. Aktinson and Mr. Freelan said that in the last 18 months, "not only did the number of proxy contests continue to decline, management continued its ability to mount successful defences."