Activist hedge funds may strike fear into the hearts of corporate managers, but shareholders should be looking at them more favourably. Many are coming to be seen less as corporate raiders and more as catalysts to improve corporate performance and better corporate governance.
A report from the Organization for Economic Co-operation and Development found activist hedge funds can be positive forces when it comes to corporate governance. The OECD report, released in May, concludes that activist hedge funds and private-equity firms “could strengthen corporate governance practices by increasing the number of investors that have incentives to make active and informed use of their shareholders’ rights.”
This could include influencing corporate strategy by pushing for the sale of the company, prodding it to undertake a restructuring or, conversely, by blocking a proposed transaction. Or the changes could be less dramatic, including: encouraging better management by shaking up a sleepy board; pushing for better governance practices; or improvements to social and environmental policies.
“When hedge funds started up and grew quickly, a lot of corporate executives and directors became concerned that they were more focused on short-term results than on corporate sustainability,” says David Brown, executive director of Ottawa-based Brown Governance Inc. “The OECD study and other observations are leading people to realize that isn’t necessarily true and that activist hedge funds aren’t always the villains they are being made out to be.”
Bill Mackenzie, director of special projects at the Toronto-based Canadian Coalition for Good Governance, notes that activist investors are now using corporate governance tools that have existed for a long time to gain access to the boardroom in order to influence companies directly. “This is a healthy engagement,” he says, “that puts the existing board on its toes, as well as management, opening it up to become more highly tuned to outside advice and new strategies for the company.”
Recent experiences in Canada with activist funds have shown numerous favourable outcomes for shareholders. For example, Hawkeye Capital Management LLC, Knott Partners Managment LLC and Pershing Square Capital Management LP opposed Illinois-based Sears Holdings Corp.’s insider bid for Toronto-based Sears Canada Inc. before the Ontario Securities Commission — causing the OSC to intervene on behalf of minority shareholders.
“A lot of the change seen in Canada is because of the willingness of U.S.-based funds to come to Canada and use the tactics they honed in the U.S. to have public confrontation in respect to Canadian companies,” says Peter Hong, partner at Davies Ward Phillips & Vine-berg LLP in Toronto.
Another recent case involved AnorMED Inc., a Vancouver-based biotech company, and long-time investor Baker Brothers Investments LP of New York. Baker Brothers became dissatisfied with the performance of the company’s board and initiated a successful proxy battle for board changes.
Hong notes the fund also feared the company was going to sell itself, in what the fund believed would be a poorly timed transaction. “This was the opposite of what many people think hedge funds do, which is come in and sell right away,” he notes.
“The end result was the company was sold well down the road,” Hong says, “primarily because there was a bit of a delay and a very attractive price offer. For shareholders, the delay and the sale process resulted in greater value.”
Another highly publicized case involved California’s Scion Capital LLC, which actively opposed South Africa-based Goldfields’ acquisition of Toronto-based Bolivar Gold through a proxy battle and court proceedings.
According to Brown, Canadian companies are getting more attention from U.S. money managers. That may be partly because they believe opportunities for activist investors in Canada are even greater than they are in the U.S. The reasons range from less competition in the marketplace to a lighter regulatory touch, especially compared with the often stifling effect of the U.S. Sarbanes-Oxley regulatory regime.
“I’ve heard people in the investment world say it is easier [in Canada] to organize proxy fights and gather shareholders together and replace directors,” he says. “Those rules are less integrated than in the U.S., and the U.S. seems reluctant to reform them. So, there are more options and better opportunities for hedge funds and other activist investors.”
If that’s the case, Canadian shareholders should welcome their involvement. The reality is hedge funds may be a positive force, both for shareholders and the economy as a whole, if their efforts lead to leaner, more efficient firms. IE
@page_break@
Activist hedge funds are on the side of the shareholder
OECD report finds hedge funds are no longer corporate bullies; their involvement can kick-start faltering companies
- By: Clare O’Hara
- November 12, 2007 October 28, 2019
- 11:05