The economic downturn is making proxy fights one of the stories of the year for 2009. Most battles have been in the resource sector so far, particularly with junior mining companies. But the scope of possible activity could widen as share prices in all sectors continue to struggle and shareholders become more aggressive.
Ogilvy Renault has been involved in five proxy fights since the beginning of January 2009. Our firm has represented dissident shareholder groups, corporations and independent directors in the dynamic context of a proxy battle. Because of the absolute devastation of market caps in 2008, we have seen a lot of activity in the first part of this year, and we believe that we are going to see a lot more.
The latest proxy battle in which we were involved was for the control of Polar Star Mining Corporation. We acted for Douglas Willock who was working to remove the existing board and replace them with his own board of nominee directors. The now-former board had removed Mr. Willock as President and CEO on January 30, 2009 over a disagreement regarding the right strategy for the corporation. He continued to serve as a director of the company and launched his proxy fight in early February. Mr. Willock and his supporters won, receiving almost 60 per cent of shareholder proxy votes.
The Polar Star example is a common type of proxy fight—where shareholders believe that the board of a company should do things differently to maximize shareholder value. Another kind of fight can involve investors such as hedge funds that tailor themselves as shareholder activists. In these situations, investors focus on companies where there is a significant difference between the market cap and cash on hand. The investor may launch a challenge to the current board of a company when motivated by a desire to have a company do a share buyback or pay out the cash on hand by paying a dividend.
We are also encountering circumstances where proxy battles are the result of poor relationships between the parties and can be motivated by differences of opinion on who should be managing a company and its board. These types of scenarios can be based more on clashes between different personalities rather than diverging visions, but can still seriously divide a company’s board and its shareholders.
Whatever the reason for launching a proxy battle, Canadian law provides a unique tactic by which one can be commenced that is not necessarily available in other parts of the world: the power to requisition a shareholder meeting. It gives shareholders the ability to replace a board of directors in between the annual meetings of a company. Sophisticated shareholders are recognizing that a mechanism exists to force a different vision for the company—and they are using it. Boards are playing a dangerous game if they ignore the demands of shareholders, especially in today’s market.