Canada's mining industry should expect more proxy battles as cost overruns and writedowns on large acquisitions collide with activists that are increasingly looking for short-term gains.
Activist shareholders have traditionally gone after companies with poor share performance, expensive board members and operational weak spots. But they are widening their sights to target companies with no glaring flaws.
"I think there's a sense you have to have greater preparedness on the defence side now because people have been elephant hunting," said Jeremy Fraiberg, a partner and co-chairman of the mining group at Osler Hoskin & Harcourt LLP.
While proxy battles are increasing across Canadian business, the mining industry accounted for about half these contests in the past five years, according to Fasken Martineau DuMoulin LLP's 2013 Canadian Proxy Contest Study. The firm looked at the 87 contests in total between 2008 and the end of 2012 that sought to replace all or some board directors. That was a 98-per-cent increase over the previous five-year period; dissident groups won 55 per cent of the time. The stakes are higher, the fights are longer and the jabs are both personal and public.
But it's not just a tough climate and investor frustration that will shape the proxy landscape through 2013.
The mining industry may also see an uptick in a kind of activist activity known as "short-termism" – the rise of investors such as hedge funds that are in it for the quick rise in stock price. These investors look for companies they can hold for between two months and three years.
The trend may have stemmed in part from the financial crisis. After the recession, many hedge funds' primary source of capital changed, according to 2012 research from KPMG.
While hedge funds' largest investors used to be high-net-worth individuals and families, more demanding institutional clients now predominate.
"We used to have situations where there would be a quiet letter to the board, confidentially, before there became an embarrassing fight," said Orestes Pasparakis, a partner at Norton Rose LLP.
"And now, the fight becomes the prize and we see things are routinely leaked by the activist early in the process. And we see very public fights."
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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