A Canadian shareholder revolution

For years, proxy battles rarely, if ever, cost top management or boards any sleep in Canada. Not only were battles rarely successful, the fights themselves were highly uncommon. Ever since the global financial crisis, however, this has changed. Shareholder activism is now far more common and gaining popularity. 

‘Typically, in Canada things were not as dicey as in the US, but that’s not true now,’ says Roop Mundi, vice president at Kingsdale Shareholder Services in Toronto. He notes that in late June the CEO of TriNorth Capital and a shareholder group trying to wrest control of the investment company ‘had it out on TV’, an event almost unimaginable 12 months ago. 

‘The big thing in Canada is the momentum to get into proxy fights,’ adds Mundi. He points out that while three or four years ago Canada saw five or six proxy fights annually, there were 22 proxy fights and unsolicited contests in 2008 and there had already been 19 further cases by June 2009.

Glenn Keeling, a partner at Laurel Hill Advisory Group in Toronto, attributes the surge in shareholder feistiness to the economy. ‘In the wake of the world financial market meltdown, stocks have taken a nosedive, shareholders have seen significant erosion in investments and, unlike the US market, the Canadian market is very active in dissident activity,’ he explains. ‘It’s been an incredibly active market in Canada for the last year.’

Keeling points out that in this new climate, ‘we don’t use the word routine for AGMs any more. People used to say, It’s just a vanilla meeting. We’re going to appoint our auditor and elect our directors. But both of those issues have become lightning rods. There’s much more scrutiny on everything the company is doing. Shareholders have lost significant value in their portfolios and they’re looking for action.’

One reason dissidents are so scrappy in Canada is the regulatory environment. Keeling describes Canada as ‘probably the easiest country in the world in which to take over a company.’ Shareholders can press to install a slate of directors without government approval, and the simple act of requisitioning a meeting is enough to put a company into play.

Because proxy battles are so easy to launch, dissatisfaction brewing outside Canada can culminate in swift action inside Canada. American and European hedge fund managers and institutional investors with positions in Canadian companies are becoming increasingly combative. ‘You’re getting people from the US and Europe coming in to launch fights, so Canadians are thinking, Why don’t we do it, too?’ says Mundi.

What’s more, there’s a sense that aspects of the old regulatory safety net for public companies may be crumbling. Mundi cites the case of HudBay Minerals, the largest proxy fight in Canada so far this year. When a European shareholder group tried to stop HudBay from issuing new shares to fund a merger with Lundin Mining, the company felt it was on solid ground because the Ontario Securities Commission (OSC) does not require shareholder approval in these situations. 

But the OSC ruled that HudBay did need shareholder approval to issue 153 million new shares to buy Lundin, because issuing these shares is so dilutive. Soon after, the shareholder group gained control of HudBay. 

No one is safe
Shareholder demands are being voiced in all industries. Keeling notes that in the past few months, numerous actions have taken place in the resource sector, but shareholders have also taken aim at sporting goods and financial services companies. In the last eight months, Keeling has even seen activity in smaller Canadian firms, those with less than $300 million in market cap. 

‘It’s not the kind of event they deal with on a regular basis,’ he says. ‘And when this sort of thing comes along, smaller companies end up taking their eye off the day-to-day business and becoming consumed in these issues.’

At Rockwell Diamonds, for instance, a large shareholder, Pala Investment Holdings, called a special meeting to terminate the board and install its own slate of candidates. Susie Bell, who heads investor relations at Rockwell, notes that the shareholder demands came at a time when Rockwell and many other diamond producers were curtailing operations to control costs.

Rockwell engaged Laurel Hill as proxy solicitor, so Laurel Hill set up a call center and began reaching out to retail investors – who, Bell says, proved ‘instrumental in achieving the necessary votes.’ In June 2009, 74 percent of Rockwell’s shares were voted, compared with just 15 percent at the September 2008 annual meeting. More importantly, 57 percent of votes cast opposed the removal of one or more of the existing directors. 

In 2009 executive compensation became a cause célèbre in Canada as it did pretty much everywhere else. Mundi notes that shareholders now want more information on everything from bonus payments to retention schemes. ‘And yes, people are upset if CEOs are running about in private jets and yachts and the company is falling apart,’ he adds.

Learning from others’ mistakes
Arden Furlotte, the lawyer responsible for governance and compliance at SNC-Lavalin, notes that many issues that are emotionally charged in the US are adopted with much less angst in Canada because issuers learn from their US counterparts. 

This year, for example, she says corporate secretaries and general counsels wrestled for the first time with creating a compensation discussion and analysis, as mandated by National Instrument 51-102. ‘We had to disclose things we’d never disclosed before, such as what happens upon change of control or severance,’ Furlotte explains. This is an area US-listed firms have already dealt with, so Canadian public issuers learned from those lessons.

Another important issue was say on pay, the increasingly popular resolution asking that shareholders be granted a non-binding ‘yes’ or ‘no’ vote on a company’s compensation practices. ‘With the market turmoil, shareholders feel they should have a say now,’ says Chris Makuch, vice president at Georgeson Shareholder Communications in Toronto. 

Furlotte points out that many Canadian companies are considering voluntarily embracing an advisory pay vote, rather than being backed into a corner. ‘The attitude is that it’s coming anyway, so we might as well just offer shareholders a non-binding say-on-pay vote,’ she says. This is a concept that is also starting to become prevalent among US firms, the idea being that the corporate sector must voluntarily police itself or be forced into compliance through government regulation.

This year, says Furlotte, ‘our corporate secretary prepared for a vote on say on pay, which never happened. But it could have.’ Because shareholders can raise any issue at a Canadian annual meeting, corporate secretaries must be ready for anything and make sure to carefully brief their CEOs. To prepare, SNC-Lavalin holds a mock annual meeting, explains Furlotte, noting that this is a chance to hone strategy. ‘We consider how to approach a specific issue,’ she says. ‘Are we going to blow it out of the water or are we going to back it?’ 

Furlotte advises other companies to prepare well ahead of the annual meeting. Although the chairman usually has the votes to defeat shareholder initiatives, it’s important from a reputational standpoint not to ‘get caught with your pants down,’ she emphasizes. 

A glimpse ahead
The heightened activism hasn’t necessarily led to a climate of incivility in Canada. Laurel Savoy, vice president of trust services for the eastern region of CIBC Mellon Trust Company, says that ‘even though more shareholders are vocal and engaged, we have not seen more contentious meetings, possibly because shareholders realize the challenges issuers are facing are widespread.’

Savoy points out that shareholders have expressed interest in the concept of voting for individual directors rather than voting by slate. Makuch makes a similar observation, noting that companies have voluntarily moved toward electing individual directors as a good governance practice. ‘In Canada, any company that continues with slate voting will be caught flat-footed in the next year or so,’ he predicts.

In addition, Canada is facing several other governance changes, including a shift to a notice-and-access method of proxy distribution, according to Mundi. He says Kingsdale and others have asked that the electronic delivery of proxy materials be delayed so that Canada can avoid the pitfalls encountered in the US, such as a depressed retail voter turnout.

Mundi and Keeling both say the new proxy climate is a boon to advocates of ongoing, two-way shareholder communications. ‘I know too many firms that really don’t know who their shareholders are,’ says Keeling. ‘If a company goes into play, everything you knew about your shareholder base has the potential to be wrong within 24 hours of an announcement. The arbitrageurs will come in, people will jump out, and what you have to rely on is your long-standing, steady investors.’  

Keeling also emphasizes that shareholders are changing, so corporate secretaries, boards and executives must change, too. ‘Historically, if shareholders didn’t like something, they voted with their wallets and walked,’ he notes. ‘But valuations are so low that the hit is too large to simply walk. Shareholders nowadays would rather stay the course and propose to effect change.’