An Overview of 2013
Shareholder activism continued in 2013, ranging from behind-the-scenes discussions to hard-fought proxy contests. There were more than 25 instances of activists demanding change through shareholder meetings, with dissidents being successful in whole or in part about half of the time. Most activist demands were for the appointment of nominees to the board, either a few or a full slate, with the objective of bringing about strategic change.
Increasingly there were settlements or “negotiated peace”, with boards responding to activists’ demands without the distraction, cost and hostility of a proxy contest. Some issuers entered into formal, written settlement arrangements agreeing, among other things, to appoint the activist’s nominees in return for the activist’s agreement to support management for a year or more. For instance, Talisman Energy entered into a settlement agreement with Carl Icahn who first announced through a tweet that he intended to discuss board seats and strategic alternatives with management.
There was heated debate on the appropriateness of activist-paid bonuses to director nominees and issuer-paid success fees to soliciting dealers, both as highlighted in the Agrium/Jana Partners proxy contest. Though it may yet be possible to structure director compensation arrangements in a manner which balances an activist’s objectives with the concerns of other stakeholders, the court of public opinion has clearly turned against the use of success-based soliciting dealer fees.
There were a number of court decisions in 2013. The courts considered the appropriate period of time between the date of a meeting requisition and the date on which the meeting is held. In the two cases where the courts considered this issue, the courts found that the boards acted within a range of reasonableness in delaying the requisitioned meeting for five to six months to coincide with the date already set for an AGM. Factors the courts took into account in determining reasonableness, bearing in mind that both issuers faced financial pressures, included cost, demands on management and voter fatigue, and a lack of evidence that the delay would cause material prejudice to the activist. Board process, as always, is important in seeking to rely on the business judgment rule. In another decision, the court postponed a meeting where the activists were acting jointly and in concert and had not made appropriate early warning disclosure.
Where a dissident shareholder convened a shareholder meeting because the issuer failed to do so, the court considered the extent to which the shareholder should be reimbursed for meeting costs as permitted under the corporate statute. The court allowed the expenses that specifically related to requisitioning, calling and holding the meeting and were incurred between the date of requisitioning the meeting and the date of the meeting.
In other decisions, a court upheld the disqualification of votes by the chair of the meeting where the dissident proxy circular contained material omissions, and another court fixed an earlier record date for a meeting where it found the directors to have manipulated the voting process by issuing shares to dilute the dissidents’ positions.
On the Horizon
Shareholder activism will continue in 2014, with several proxy contests already underway. Hedge funds, both Canadian and U.S., will increasingly make demands for changes with increasing support from large institutional investors. Activist funds are no longer the corporate raiders of the past but are respected by many significant institutional investors for successfully realizing shareholder value. U.S. activist funds are reported to have almost U.S. $85 billion under management and can therefore take significant positions in large cap companies.
Boards must continue to focus on business strategy and performance, in addition to corporate governance, and engage with investors to hopefully avert an activist’s attention. At the same time, issuers need to take steps to monitor investor activity and be prepared for activism. Issuers will (and should) continue to implement advance notice by-laws. These by-laws are not about entrenchment of incumbent directors, but rather give shareholders the opportunity to properly consider new board nominees.
Lastly, regulatory changes regarding early warning reporting, shareholder rights plans and mandatory majority voting policies are all expected this year though the timing is unclear. The securities regulators are also considering how best to address proxy voting issues, like under-voting and over-voting, though they have yet to tackle the tricky empty voting issue that drew attention in the TELUS/Mason Capital proxy contest. Also on the horizon, the regulators will continue to consider issues related to the influential proxy advisory firms, ISS and Glass Lewis, though they have announced that they will be adopting a policy-based approach.
A lot lies ahead in 2014…