If the 2012 season is any indication, we can expect to see a stronger level of shareholder activism in 2013. While companies listed on the TSX Venture Exchange (TSXV) remain the primary targets, there has been a steady rise in the number of listed companies on the Toronto Stock Exchange (TSX) (including large-cap companies) entangled in costly and prolonged proxy fights. On the dissident front, we are seeing well-capitalized dissidents from Canada and abroad making their way into Canadian corporate boardrooms. The Canadian regulatory regime provides a number of tools available for activist shareholders thereby requiring public companies in Canada to make advance preparations for any dissident activity.
We have conducted a detailed study of Canadian public proxy contests involving contested director elections over the past three years. This bulletin presents our findings related to the most common questions from companies and dissidents during their initial preparation.
Who Are the Typical Targets?
Of the 74 Canadian proxy contests reviewed since 2010, the majority of targets were TSXV-listed companies with a market capitalization of between C$10-million to C$100-million, with a median of approximately C$19-million. As shown in the chart below, the majority of proxy contests have been in the mining sector, in particular, companies with gold projects (approximately 70% of the targeted mining companies). Small- and mid-cap industrial, energy and technology companies (including life sciences companies) were the next most common targets. Importantly, we are increasingly seeing large-cap companies being drawn into proxy contests. In 2010, seven TSX-listed companies with an average market capitalization of C$70-million were targeted. This number increased to eight in 2011 and 12 in 2012, with an average market capitalization of C$268-million and C$2.4-billion, respectively. In 2012, we saw the boardroom shakeup of CP Rail, a 130-plus-year-old iconic Canadian corporation, by Pershing Square, a U.S. hedge fund with over C$10-billion of assets under management. More recently, JANA Partners, a U.S. hedge fund, acquired an interest in Agrium, a company listed on the TSX with over US$15-billion market capitalization, and nominated candidates for election as directors. The incidences of shareholder activism may, in fact, be higher as some contests are never made public and are resolved through private negotiations.
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Who Are the Typical Dissidents?
With respect to the proxy contest dissidents, in the past three years, over half were non-institutional investors (55%), including founders (7%) and existing or former management (20%) of the targets. More notably, in 2012, we saw a surge in the number of foreign-based (non-Canadian) dissidents, mostly as a result of increased participation from foreign hedge funds, investment funds and private equity firms.
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What Are the Success Rates so far?
Our study showed that, over the past three years, dissidents have a slight edge over management if we consider a partial win to be a success for the dissident (on the basis that a negotiated settlement resulting in even one board seat for the dissident can be considered a win since it is a change from the status quo). What the study cannot track are those incidents where the dissidents were successful in agitating for change without the dispute becoming public. Over the past three years, 54% of the proxy contests ended in at least some form of success by the dissidents; half of these (24%) were partial victories, which often involved the dissident winning a number of seats on the board through negotiated settlements. While the majority (57%) of proxy fights were decided at a shareholders' meeting by election, about 36% were settled prior to or after the meeting, and 7% of the proxy fights were withdrawn or cancelled. Our study also shows that these outcomes are largely unaffected by whether a full or partial slate is sought by the dissident. With the recent adoption by the TSX of rules requiring individual, as opposed to slate voting, and the TSX's support of majority voting policies for the election of directors in an uncontested meeting, it may become easier for dissidents to achieve an even greater level of success in having alternate directors elected.
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Are Contests Typically Resolved at an Annual or Special Meeting?
Canadian corporate law permits a dissident shareholder (or a group of shareholders) holding not less than 5% of the issued and outstanding voting shares to requisition a special meeting of shareholders. Over the past three years, 49% of the concluded proxy contests were initiated by such requisition. The study also found six "ambush" cases where the dissidents waited for the annual general meeting (AGM) and announced its slate of director nominees with little or no prior notice. For purposes of this bulletin, we considered a contest to be an ambush if the dissident made the announcement within five days of the scheduled shareholders' meeting.
There have historically been very few ambush contests in Canada, mainly due to legal and practical difficulties of successfully soliciting proxies without publicizing the dissident's campaign. A company can also take steps to avoid an ambush strategy by adopting an advance notice bylaw or policy, which we discussed in our October 2012 Blakes Bulletin:Proxy Contests: Lessons from 2012 Proxy Season. Advance notice provisions are gaining increased acceptance in Canada and can also be readily adopted as a strategic response to any anticipated or proposed shareholder activism. In 2012, there were five proxy contests in which the company adopted some form of advance notice provisions in response to dissident actions. These contests all took place during the second half of 2012 with varying levels of success. Since our October 2012 Blakes Bulletin, the number of Canadian issuers with advance notice provisions has doubled (now over 60 companies) and is expected to increase further as we proceed into the 2013 proxy season. While it is still predominately TSXV-listed mining issuers that are adopting such provisions, adoption by TSX-listed companies is becoming more common. The requirements under these provisions are evolving and are increasingly robust, adding extra burdens on the dissidents, including recruiting a slate of director nominees early in the process.
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Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. have recently published their 2013 Canadian Corporate Governance Guidelines affirming their support for advance notice provisions subject to the requirement that they fall within applicable parameters (see our January 2013 Blakes Bulletin: 2013 Proxy Advisory Voting Guidelines: Matters to Consider).According to ISS, advance notice provisions "provide a reasonable framework for shareholders to nominate directors by allowing shareholders to submit director nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review." As discussed in our October 2012 Blakes Bulletin, in 2012, the Supreme Court of British Columbia and the Ontario Superior Court also upheld the right of management of a company to adopt advance notice provisions in the face of a proxy contest.
How Long Does a Proxy Contest Take?
Our study showed that, over the past three years, a proxy contest took an average of 60 days from its first public announcement until election at a shareholders' meeting or settlement outside of the meeting. However, timing varies considerably depending on, among other factors, the use of litigation, both as an offensive and a defensive tactic. In addition, contested shareholders' meetings are frequently postponed or adjourned. Our study found that 32% of the contests were either postponed or adjourned and that at least 58% of the contests involved litigation or procedural disputes. The use of "preliminary" dissident circulars to allow the dissident to solicit well in advance of a shareholders' meeting, but without formally soliciting forms of proxy, can also substantially lengthen the duration of a proxy contest. Without proper preparation, including having a response plan in place, a company can suffer a significant disadvantage in dealing with an activist shareholder that has had months to formulate its plan of attack before contacting the company.
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What Are the Most Common Solicitation Strategies?
Under Canadian securities and corporate law, companies and dissidents are generally prohibited from soliciting proxies unless an information circular is furnished to shareholders. There are, however, exemptions to the general rule. For example, dissidents soliciting proxies from 15 or fewer shareholders may not be required to furnish an information circular. In addition, a dissident may solicit proxies by public broadcast, speech or publication provided that certain prescribed information, including information about the dissident's nominees, is made publicly available. Dissidents with large shareholdings or the support of other key shareholders may take advantage of these exemptions, although our study found only five instances where the dissident relied solely on an exemption and did not publish a dissident circular.
Traditionally, a dissident would wait until the company files a management information circular in connection with an upcoming shareholder meeting before filing its own circular. Unlike the company, a dissident is not required to file its circular at least 21 days prior to the meeting. This strategy allows the dissident to tailor its circular in response to the management circular. However, the earlier a circular is filed publicly, the sooner the party can solicit. According to our study, in proxy contests where the company and the dissident both filed a circular, the company had on average a 13-day head start in solicitation (the median is eight days).
However, in 2012, two dissidents chose not to wait until the company had filed its management information circular, but rather filed their own circular in advance utilizing the public broadcast exemption available to dissidents under Canadian corporate and securities law. In the CP Rail proxy fight, the dissident filed a preliminary circular, identifying the dissident's nominees and rationale for change, before the AGM was even scheduled, effectively providing the dissident a two-month head start in solicitation. The same approach was adopted by JANA Partners in connection with Agrium.
Our three-year study revealed important considerations for companies and dissidents. Participants in Canadian capital markets need to be mindful of the increased levels of shareholder activism. Proxy contests are no longer limited to TSXV-listed or junior mining companies. Large-cap, TSX-listed companies are now becoming targets of well-funded activists from outside Canada. Dissidents are offered a number of tools under the Canadian regulatory regime and, with proper planning and a well-executed strategy, are often successful in effecting change. Companies can also succeed in proxy contests and can prepare themselves through advance notice provisions and early and constant communication with shareholders.