Ask Canadian corporate governance gurus what they think about proxy battles \u2014 the game in which shareholders take on corporate boards by campaigning to have them voted out or forced to change policies \u2014 and you\u2019ll generally elicit a low-key reply.
\u201cWe don\u2019t have a lot of them in Canada,\u201d says David Brown, executive director of Ottawa-based Brown Governance Inc. <\/b> \u201cThere aren\u2019t a lot,\u201d agrees Bill Mackenzie, director of special projects with the Canadian Coalition for Good Governance<\/b> in Toronto. \u201cIt\u2019s a small number,\u201d says Debra Sisti, vice president of Toronto-based Institutional Shareholder Services Canada Corp. <\/b>
But those on the shareholder side, such as Wes Hall, president and CEO of Kingsdale Shareholder Services Inc. <\/b>, a Toronto-based company specializing in facilitating shareholder communications in proxy fights, have a different view. The numbers of known fights may seem small, he acknowledges, but overall activity relating to proxy fights has surged in recent years. That activity often takes the form of preliminary skirmishes in which investor challenges are conceded privately to avoid full-on proxy fights. \u201cIt\u2019s becoming an investment strategy,\u201d Hall says.
On its Web site, Kingsdale lists 20 cases, involving companies such as AnorMED Inc., CREO Inc., Northern Financial Corp., Saskatchewan Wheat Pool, and Vector Aerospace Corp. Work the firm has done on proxy solicitation, another 14, including heavyweights such as Barrick Gold Corp., Petro-Canada and Sun Life Financial Inc.
\u201cShareholders are becoming much more impatient, and their style of investing is much more aggressive,\u201d says Hall. \u201cWe\u2019re seeing more proxy fights, and we expect that this is going to continue to increase.\u201d
There\u2019s a reason so much activity around proxy fights \u2014 whether real or threatened \u2014 is happening below the governance gurus\u2019 radar.
Under shareholder communications rules, as many as 15 investors can privately unite on a common position without informing anyone. The issues usually revolve around executive board membership, dividend payouts, or asset disposition. Once united, they can spring their demands on an unprepared board, with the threat of a looming proxy fight emanating from a well-coordinated shareholder group redoubling the already-potent effect. \u201cIt can shock the hell out of companies,\u201d says Hall.
What was once a quiet, little-known area of investor brinkmanship is starting to heat up. \u201cProxy fights are now part of the terrain,\u201d says Bill Braithwaite, a governance specialist with law firm Stikeman Elliott LLP<\/b> in Toronto. \u201cIt started with the arrival of the hedge funds and the advent of activist shareholders.\u201d
Rob Kittel, a partner with Goodwood Inc. <\/b>, a Toronto-based hedge fund, agrees. Speaking from experience with proxy fights at Vancouver-based CREO, New York Stock Exchange-listed Cenveo Inc. and, most recently, Toronto Sock Exchange-listed ATS Automation Tooling Systems Inc., Kittel says: \u201cThe reception by investors and the willingness of boards to accept a tool like proxy fights is much greater than it was.\u201d
The climate in Canada has changed remarkably in recent years, Kittel says, probably as a result of developments in the United States, where proxy fights have become increasingly common every year for well over a decade.
\u201cA lot of the people who run these things in Canada are U.S. hedge funds and institutional investors,\u201d Kittel notes.
The upswing in proxy contests in the U.S. directly followed the Securities and Exchange Commission\u2019s decision to introduce more relaxed rules on proxy solicitation in 1992.
\u201cThe amendments eliminate unnecessary regulatory obstacles to the exchange of views and opinions by shareholders and others concerning management performance and initiatives presented for a vote of shareholders,\u201d the SEC stated at that time. \u201cThe rules also remove unnecessary limitations on shareholders\u2019 use of their voting rights and improve disclosure to shareholders in the context of a solicitation as well as in the reporting of voting results.\u201d
Since then, the number of U.S. proxy contests has skyrocketed.
April Klein, a professor at New York University\u2019s Stern School of Business, says hedge funds made hay with the SEC\u2019s 1992 reforms. But rather than conducting actual proxy fights, they have refined the tactic of using the threat of a proxy solicitation into \u201ca major weapon.\u201d
Of 155 activist campaigns Klein tracked in a recent study, only 18 resulted in actual fights; threats to begin a proxy solicitation were made in 42 cases.
\u201cHedge funds are extremely successful in getting existing management to acquiesce to their demands, be it representation on the firm\u2019s board, a change in strategic operations, share repurchases by the firm, scuttling an existing merger proposal, or being acquired by another firm,\u201d says Klein, who has written several studies analyzing patterns among large numbers of U.S. proxy fights,
@page_break@Klein points to a 71% success rate in demanding board representation. \u201cThey succeed over 50% of the times in preventing an ongoing merger, or in forcing the firm to be taken over by another entity,\u201d Klein adds. In total, she has found, hedge funds have a 60% success rate for all demands made.
In 2001, just nine years after the SEC unleashed the proxy wars in the U.S., Ottawa amended the proxy rules in the Canada Business Corporations Act, which governs 160,000 Canadian businesses. As with earlier U.S. reforms, Ottawa wanted to liberate shareholder communication from awkward, expensive proxy solicitation rules.
Those rules were originally aimed at keeping \u201cbeneficial shareholders informed about the affairs of the corporation and preventing the unfair procurement of votes for shareholders\u2019 meetings,\u201d says Stuart Morrow, a lawyer with Davis LLP<\/b> in Vancouver with expertise on Canadian proxy issues. But, he says, the 2001 Proxy Amendments \u201creflect the need to relax these rules sufficiently to permit an open exchange of views among shareholders.\u201d
Morrow strongly endorses the 2001 reforms: \u201cThe fact that opposing shareholder interests lock horns in a proxy battle prior to and at the time of a shareholders\u2019 meeting does not imply a breakdown in the corporate democracy process.\u201d
Recent corporate mega-scandals such as Enron Corp.\u2019s \u201cserve to emphasize the importance of preserving and improving the means by which management can be held accountable to the shareholders,\u201d says Morrow, who would like to see further reforms to Canadian proxy rules, including a tighter regime governing the enforceability of agreements among shareholders.
\u201cCourts need to better understand the vital role such agreements play in the early formulation of transactions and in influencing decisions of the parties committing financial resources to a transaction,\u201d he says. \u201cIt is vitally important to affirm the binding nature of these agreements.\u201d
But the really big reform Morrow thinks Canadian shareholders should be tackling is the abandonment of the dual-class or multiple-voting-share structures common among family-controlled corporations in favour of the internationally accepted \u201cone share, one vote\u201d structure.\t IE<\/b>
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