The economic crisis and corporate social responsibility agendas spurred shareholders into unprecedented action in 2009. Shareholder activism intensified and the strategies became more aggressive as shareholders found that forcing their own economic agendas in this manner could be easier, cheaper and more effective than acquiring additional voting equity to earn board representation or assume control. In 2009, more often than in the past, companies dealt with a proactive and organized block of shareholders who did not agree with directors and management, and wanted a say themselves.
Shareholders of all sizes pushed companies (and their boards) not only to enhance value through strategic transactions but often to unlock value for shareholders by selling non-strategic assets or freeing up cash reserves for dividends. This was done through proactive communications with management that pushed for shareholder votes on significant corporate decisions; proxy contests directed at changing boards, effecting specific approvals or changing control itself; and requisitioned meetings or shareholder proposals to force decisions on special interest matters. At the same time, shareholder advocates used a variety of techniques, some new, to promote maximum shareholder participation and enfranchisement.
We see this activism increasing in 2010.
In North America, regulators are facilitating increased shareholder involvement in response to activist shareholders who say the current rules are not allowing them to make their voices heard effectively. In the United States, in 2009 both the NYSE and the SEC made changes to proxy rules that are intended to make them more shareholder-friendly. Canadian regulators and shareholders are paying attention to these developments, and changes to the Canadian proxy rules may follow. The TSX recently enacted a rule change that will require a listed company to obtain shareholder approval when acquiring another public company if the transaction involves issuing securities in excess of 25% of the acquiring company’s outstanding securities (on a non-diluted basis). Although this requirement is consistent with that of many stock exchanges outside Canada, it is a big change for the Canadian M&A landscape and we are already seeing its impact on deal structuring and risk allocation.
Several recent Ontario court and regulatory decisions have also demonstrated that tactics taken by management to interfere with shareholders’ democratic rights will not be tolerated. In its decision in Hudbay Minerals, the OSC focused on Hudbay’s governance practices in connection with shareholders’ meetings, including a requisitioned meeting to change its board; the OSC sent a strong message against using tactical scheduling to frustrate the ability of shareholders to vote on a major matter. An Ontario court sent a similar message concerning management’s use of technical tactical challenges in the recent proxy battle for control of management of the Citadel Group of Funds.
In 2010, equity holders, large and small, will continue their demands to formally exercise their democratic rights to have a say in corporate decisions. Companies should be ready to hear from their shareholders and proactively communicate the company’s strategies. We think investor relations groups and proxy contest advisers will be busier than ever in 2010.