On the day before its 2007 annual meeting of shareholders, ATS Automation Tooling Systems Inc., of Cambridge, Ont., issued a press release announcing that its board of directors would resign on the morning of the meeting. Having reviewed the proxies submitted by its shareholders, the ATS Automation board realized that they were soundly trounced by a dissident group comprised of hedge funds Goodwood Inc. of Toronto and New York-based Mason Capital Management, LLC. The board resigned to allow the shareholder meeting to proceed in an orderly basis, with the election of new directors nominated on the dissident slate.

Disappointed with ATS Automation’s plummeting stock price, the failed IPO of a subsidiary, and the refusal of the incumbent board to axe its CEO, the dissidents moved to trigger the proxy fight. Their campaign to ATS Automation shareholders clearly struck a nerve and turned out to be a resounding success, at least from the point of view of Goodwood and Mason. After winning the proxy fight, the challenge for the new board is to implement the appropriate strategies to reverse the deterioration in shareholder value.

The wholesale replacement of a company’s board by a dissident slate was once relatively rare in the Canadian marketplace but is now becoming much more commonplace. Also increasing are proxy fights over individual board members and battles to scuttle proposed mergers or acquisitions. Indeed, we have seen a steady increase in proxy battles over the last five years, rising from only six in 2003 to 16 in 2007. And, thus far in 2008, the trend shows no signs of abating — we have already seen six contests and there are rumblings of more to follow.

Shareholders are finding their voice and flexing their muscle in ways they never have before. Undoubtedly, the success of dissident shareholders like Goodwood and Mason only serves to embolden other hedge fund and institutional shareholders who are seeking to jump-start underperforming companies. Other dissidents include disgruntled current and former board members who have fallen out with their colleagues and who have a competing vision over the strategic direction a company should take.

For example, former Biovail chairman and CEO, Eugene Melnyk, is proposing a rival slate of directors at the company’s upcoming 2008 AGM. With an 11.7% stake in the company he founded, Melnyk cites dissatisfaction with the financial performance of Biovail and the direction the board is going. A 2007 fourth-quarter loss of $32 million seemed to be the final straw.

Whatever the dissidents’ motivations, it is clear that corporate boards can no longer afford to ignore the discordant voices of unhappy investors. Across all proxy fights in Canada over the last five years it appears that dissident shareholders have been successful approximately 50% of the time. This is an amazing result given all the strategic advantages held by an incumbent board and it shows that, in the right circumstances, shareholders are willing to take a chance that fresh thinking will enhance shareholder value.

Also interesting is that dissidents are able to win the day even when holding small positions in target companies. Looking only at proxy fights where dissidents have won, the average holding is 15%; however, there are examples where battles were won with less than 5% and even 1% of the outstanding shares. What is most important is that dissidents can persuade their fellow investors of the merits of their positions and the ultimate benefits to shareholder value. On the other side of the coin, dissident investors holding as much as one-third of the outstanding shares have lost the proxy fight because they were unable to effectively make their case to other shareholders.

It should be noted that making an effective case requires actively soliciting shareholders and this can take relatively deep pockets. Depending on the market cap of the company, the size and make-up of the shareholder base, and the nature of the industry, a dissident group should expect to spend between $700,000 and $1 million in fees and expenses on a successful proxy fight. Of course, when successful, it is sometimes possible for the dissident to have these costs reimbursed by the company.

So what causes shareholders to take that leap of faith? Our research shows that, in the vast majority of the cases where a dissident group has won the proxy fight, the defining issue has been the erosion of shareholder value based on the poor stock price performance of the target company.

@page_break@When the defining issue is one where there is a difference of opinion on the appropriate strategic direction of the company (without dramatically poor share price performance) shareholders have tended to give management the benefit of the doubt.

What is clear is that the ground is shifting beneath the feet of corporate Canada. With roughly half of all proxy battles ending in favour of dissident shareholders, we have entered a new environment of accountability. Combined with the increasing frequency of proxy contests, companies must not only do well but they must be seen to be doing well. If not, their employers — that is their shareholders — will surely come knocking.



Wayne Bigby is executive vice president of Kingsdale Shareholder Services Inc.; Ian Bragg is Kingsdale’s director of research & analysis.