Let's get this straight right off the top – Agrium Inc. is not buying votes in its fight against a dissident shareholder, because that would be illegal. The way Agrium and other parties pay for votes in Canadian takeovers and proxy battles is perfectly legal.
That's the problem.
Agrium is dangling the prospect of a payment of 25 cents a share to brokers whose clients vote for the Agrium slate of directors over the slate of directors put forward by Jana Partners, a hedge fund. Investment advisers can earn a minimum of $100 and a maximum of $1,500 for each retail client that supports the fertilizer company's nominees – but only if Agrium wins. A broker with a solid roster of clients who own Agrium stock could bring in a substantial payday.
Compensating an investor directly to vote one way or another would be vote buying, and that is banned. Payments to brokers are not, even though such inducements also give a broker an incentive to push a client toward the paying side. Brokers, in the main, are upstanding and ought to put their clients' interests over any short-term gain. Still, why tempt them with what looks like a bribe?
The U.S. doesn't allow it, yet such fees are relatively commonplace in Canada.
The payments are rationalized as an incentive for financial advisers who are too busy to take the time to call clients and convince them of the merits of voting one way or the other. A spokesman for Agrium stated that "this is an important election for Agrium shareholders and we want to ensure all shareholders are properly informed."
That sounds more or less like a broker's job. They are also known as financial advisers because they are supposed to give advice, and they already get paid pretty well by clients through fees and commissions for supposedly doing just that.
There are also other ways to reach shareholders. Hiring proxy solicitation firms to telephone shareholders is commonplace, and lacks the potential conflict of interest because there is no assumption that the solicitor is working for the investor.
However, over the years, such broker payments have become fairly standard in contested mergers, and are increasingly showing up in situations like Agrium's faceoff with Jana over who gets the keys to the company's boardroom.
Many people involved with the proxy system will say quietly that they do not like the payments. However, it is a game they have to play, because everybody does it.
Agrium's spokesman stressed that such solicitations are "commonly used in contested situations in Canada."
Another argument rests on the notion that the payments are disclosed to shareholders. Many companies employing the tactic will issue a press release.
In the case of Agrium, the disclosure was the bare minimum. Agrium put one sentence in its 158-page circular sent to shareholders, stating that "Agrium may cause a soliciting dealer group to be formed, and pay customary fees for such service." It is pretty easy to miss, even for the rare retail shareholder who did read the whole thing.
Almost the exact same wording appears in Jana's later 39-page mailing to shareholders – "JANA may cause a soliciting dealer group to be formed to solicit proxies on behalf of JANA in support of the shareholder nominees, for which JANA would pay customary fee." (A spokesman for Jana said the firm has not paid such fees in the past and will not pay one in this case.)
When Agrium gave brokers notice that the company would indeed pay them for votes, it was via a private communication dated March 13. In the days since, there has been no press release.
Moreover, the notice sent to the brokers states that the contents of the notice are "not to be reproduced or distributed to the public or the press or actual or prospective clients." Why? Believe it or not because "securities regulation in all provinces prohibits such distribution," according to the document. Regulators don't want investors reading anything outside the official circulars.
As for arming brokers to inform their clients, it's a one-sided story. What clients aren't allowed to see but the broker does is more than a page of "reasons to vote for arguments for Agrium's nominees." There is one bullet point explaining Jana's position.
Agrium's 25-cent fee is also pushing the envelope. When Telus Corp. offered a fee last year when fighting a dissident, it was 10 cents. EnerCare Inc. offered 5 cents in its proxy battle. TMX Group, in its attempt to push through a merger with London Stock Exchange Group PLC, offered 15 cents. Arbor Memorial Services offered 21 cents in a recent transaction. All those parties issued news releases.
At the very least, a news release should be required, and investment advisers calling their clients to discuss which way to vote should be forced to disclose any payments available if the client votes a certain way.
Better yet, regulators ought to ban the practice altogether. Nobody would miss it, except maybe stockbrokers, but they will put food on the table somehow.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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