SHAREHOLDER ACTIVISM ON THE RISE
Over the past few years, there has been a substantial increase in the amount of interaction between shareholders and boards of directors of North American companies. One of the early notable examples occurred in 2007 when Pfizer announced that its board of directors was inviting its largest institutional shareholders to a meeting to give them an opportunity to provide comments on the company's governance and compensation practices. This action was criticized by some, including Marty Lipton of Wachtell Lipton who said in a memo sent to clients that this meeting was "another example of corporate governance run amuck."1
In recent years, shareholder engagement has been more frequently initiated by shareholders and has resulted in, or contributed to, changes such as increased disclosure regarding executive compensation, "say on pay" and majority voting. Many shareholders will no longer hesitate to engage with boards and will do so in a variety of ways, from friendly to hostile, including:
- requesting meetings for "friendly" discussions or negotiations,
- more forceful or threatening requests made privately to make changes to the board or to hire named executives or consultants,
- engaging in public campaigns for change,
- making shareholder proposals, and
- full scale proxy contests.
While friendly dialogue/negotiation is often the most effective strategy for achieving desired results, proxy contests have been on the rise over the past few years in both Canada and the United States as some activists believe that a proxy contest can be more effective.
Two recent developments that may further increase shareholder activism in Canada, including proxy fights, are: (i) increased awareness on the part of US private equity firms and hedge funds of some of the advantages afforded to them by Canada's shareholder friendly legislation as compared to US rules,2 and (ii) the rules recently proposed by the Canadian Securities Administrators regarding rights plans. If adopted, these rules would enable a target board to keep a rights plan in place indefinitely if the plan is approved by shareholders.3 By making it more difficult to complete a hostile bid, this could lead to more proxy contests as bidders who do make a bid may need to requisition a shareholder meeting to terminate a rights plan. Once steps are taken to call such a meeting, bidders will likely seek to replace the board in the same proxy fight.
BE PREPARED FOR SHAREHOLDER ACTIVISM
Shareholders have become increasingly sophisticated, creative and aggressive, and typically will have carefully planned their approach to a board, including seeking advice from legal, financial and/or proxy experts. The more prepared boards are to respond to shareholders, the quicker they can level the playing field. The following are some actions that boards can take to prepare themselves:
- Know your Shareholders
- Know who your shareholders are in order to properly engage with them and to understand their perspective of the company
- Understand what motivates your shareholders - are their interests aligned with those of the company or are they only interested in short term gains?
- IR staff, or others at the company, should ensure that the board is kept aware and up to date with respect to (i) who makes up the shareholder base, (ii) significant changes to shareholdings, and (iii) correspondence to, or from, shareholders, in particular large shareholders
- Communicate with Shareholders
- Lack of shareholder engagement is one of the most common complaints during proxy contests - shareholders that feel ignored will get frustrated
- While boards must be mindful of selective disclosure issues, there is no issue with listening to shareholders and only responding where appropriate or permitted
- Some companies, such as Kinross and BMO, have adopted "shareholder engagement policies" that set out policies for dealing with shareholders - if you choose to adopt such a policy, be aware of it and follow it
- Adopt Advanced Notice Policy
- It is becoming increasingly common for Canadian companies to adopt advanced notice policies which require advanced notice of, and details relating to, proposed nominees to the board. These policies, which are common in the United States, are meant to prevent activist shareholders from surprising a board at, or just before, a shareholder meeting with an alternate slate of directors
- Both ISS and Glass Lewis generally support such policies
- Retain, Meet or be Familiar with Proxy Advisory Firms
- Some companies will put a proxy firm on retainer - while this may not be feasible/economical for all companies, boards should consider meeting with, or at least knowing, the leading proxy firms
- Consider having a proxy firm, perhaps jointly with external legal counsel, do an education session on relevant governance matters
- Know Your Governance Strengths and Weaknesses
- Poor corporate governance practices are a common issue in proxy contests
- Boards should complete self-assessments to understand governance strengths and weaknesses
- In completing such an assessment, boards should:
- understand how their practices compare to ISS and Glass Lewis guidelines as well as proposed revisions to OSFI governance guidelines
- compare their governance practices against their peers (at a minimum, those listed in their management information circular)
- consider engaging legal or proxy experts to conduct, or comment on, such analysis
- have well defined metrics when undertaking such assessments
- Create a Healthy and Open Board Culture
- Debate and open dialogue should be encouraged at board meetings
- Oral, not written, dissent should be encouraged
- Remain open, not threatened and defensive, to views of outsiders, including shareholders
- Continuing Education for the Board
- Boards should be aware of, and understand, recent developments and key issues in corporate governance. For example, boards should be aware of topics such as majority voting, say on pay and advanced notice policies, as well as proxy advisory firms' views on such topics
- Poor Documentation can Lead to a Loss of Privilege
- Proper records are crucial should a matter later become litigious - consider whether external counsel should prepare or review minutes for certain meetings
- Board members should be aware of matters that are best left for oral, rather than written (i.e. e-mail), discussion - in general, discussion should be oral and conclusions written
- E-mails among board members are generally required to be produced in litigation and can be dangerous given the casual nature in which statements are often made
Proxy fights and other forms of aggressive shareholder activism typically result in significant distraction and costs to a company and its board. The better prepared that a board is, the more likely that it will be able to prevent, settle or defend against such actions. The actions discussed above are intended to provide general advice as to steps that boards can take to prepare themselves for shareholder activism. To best prepare and defend against shareholder activism, companies should seek advice from legal and proxy specialists in the context of their specific circumstances.
1. Martin Lipton, "Directors Face-to-Face Meetings with Institutional Investors on Corporate Governance Policies and Practices", Memo from Wachtell, Lipton, Rosen & Katz to clients dated June 28, 2007.
2. Some of such advantages include (i) no disclosure of shareholdings until 10% as compared to 5% in the United States (though it is noted that there are proposed rules in Canada to lower the Canadian requirement to 5%), (ii) the right of a 5% shareholder to requisition a shareholder meeting, (iii) no staggered boards in Canada, and (iv) the availability to a shareholder to bring, or threaten to bring, an oppression claim.
3. See BLG Bulletin summarizing the proposed rules See HereAbout BLG
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.