Battles launched by dissident shareholders to sweep away corporate directors were undergoing a staggering increase in Canada long before the no-holds-barred fight at Canadian Pacific Railway Ltd. captured the spotlight last year.
Over the past five years, proxy fights over the installation of board members have risen by 84 per cent compared to the previous five years, according to a new study by lawyers with Fasken Martineau DuMoulin LLP, which acted for CP Railway in its recent battle.
The statistics quantify what corporate Canada has long identified as a growing trend. The increase has spawned a cottage industry of lawyers and consultants who specialize in waging these fights on behalf of boards and unhappy shareholders.
Economic woes, and sinking stock markets, are often followed by an uptick in proxy fights, as investors blame incumbent boards for sinking stock prices. But since the 2008 financial crisis, the number of proxy fights has continued to rise in Canada, and dissidents have won some high-profile victories, encouraging other would-be rebels. Plus, some say, the role played by U.S. hedge funds in many of these battles has resulted in the adoption of their brash methods north of the border.
"The increase that we've seen in Canada is partly the result of the U.S. hedge funds starting to come north of the border, and bringing their style of business here," said Daniel Batista, a partner with Fasken Martineau and one of the co-authors of the firm's study of 101 proxy contests dating back to 2008.
Mr. Batista says while many believe the increase of proxy battles is a permanent change on the Canadian corporate landscape, he and his co-authors, Faskens partners Brad Freelan and Aaron Atkinson, aren't so sure. They shy away from predictions but suggest that once boom times return, proxy fights could decline.
One factor that might encourage dissident shareholders in Canada to keep mounting these attacks is their surprisingly high success rate. According to Fasken Martineau's numbers, dissidents achieved some or all of their objectives winning 54 per cent of the time. In small "micro-cap" companies, they succeed 88 per cent of the time.
Most such fights only erupt publicly once private talks over a possible compromise have broken down. But once proxy battle has been launched in the open, they rarely end up settling, with just 14 per cent of the battles studied ending in a true compromise settlements, the report says.
Dissidents who employ "winner-take-all" tactics – demanding the election of a entire slate of directors, instead of just a few seats – are also more likely to end with partial or complete success.
"I think the takeaway here is, once the cannons start firing, it's really hard to stop," Mr. Freelan said.
The battles' public-relations campaigns – which often involve much more aggressive tone than has previously passed for normal discourse in Corporate Canada – are also a key to success, the study's authors say.
Mr. Atkinson said the story that gets told often ends up becoming more important than a company's financial numbers, as market momentum takes over: "It really is about controlling the narrative. Portfolio managers obviously look at fundamentals but I do think there is a bit of a bandwagon effect at times. No one's going to vote for [a slate of directors] they think will actually lower the share price."
Glenn Keeling, the managing director of CST Phoenix Advisors – a Toronto proxy solicitation firm that advises boards and dissidents – said his business is booming, for now. But he believes that if stock prices rebound, shareholders' anger will subside and the number of proxy contests will fall.
However, he said new Toronto Stock Exchange rules mandating that companies reveal the votes received by each director could still put targets on the backs of unpopular board members. Struggling small companies are particularly at risk, he said, but even large very well-run companies have been calling his firm in the wake of the CP battle.
"Dissidents are winning more often," he said. " ... Nobody is safe."
Some notable recent battles include:
-Canadian Pacific Railway Ltd.
U.S. billionaire Bill Ackman, of the New York hedge fund Pershing Square Capital Management, has a reputation for blunt talk and busting heads on corporate boards perhaps matched only by veteran corporate raider Carl Icahn, with whom he recently sparred on live TV. When Mr. Ackman took a run at CP and its bloated operating costs, it should have come at no surprise that he would succeed in installing former CN boss Hunter Harrison as CEO. As hostilities commenced, Mr. Ackman warned then CP chairman John Cleghorn, in a now infamous e-mail, of a coming "nuclear winter."
-TMX Group Inc.
A battle over a transaction, rather than a board, this confrontation last year over the company that runs the Toronto Stock Exchange saw a consortium of Canadian banks, under the nationalist-sounding label Maple Group Acquisitions Corp., beat back London Stock Exchange Group PLC's attempt to recolonize Bay Street.
The Vancouver-based telecommunications firms found itself targeted by U.S. hedge fund Mason Capital management LLC last year, as the fund tried to block the company's move to convert its non-voting shares to voting shares on a one-for-one basis, a proposal Mason denounced as "abusive." Mason had argued that voting shareholders deserved a premium to reflect the historical price difference between the two share classes. Last week, Telus announced it was going ahead with the deal.
-Lions Gate Entertainment Corp.
Carl Icahn was ultimately rebuffed in his 2010 attempt to conquer this Vancouver-based film and TV studio, which does most of its business from Santa Monica, Calif. and is responsible for various big-name horror and action films. But not before months of hard-hitting dialogue that would do well in a Hollywood script. Mr. Icahn called the company's board an "abject failure" that had the company "racing down the wrong road at breakneck speed toward a precipice" while raking in "exorbitant salaries " and "golden parachutes."
(Jeff Gray is a Globe and Mail Law Reporter.)
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