With shareholder activism rising in Canada over recent years, the number of publicly waged proxy contests has dramatically increased - from two in 2004 to nineteen in 2009. This trend is expected to continue in 2010, as evidenced by recent contests involving Lions Gate Entertainment Corp. and Crew Gold Corporation.
But managers of Canadian small- and mid-cap issuers should be cautioned that these high-profile public proxy fights, where dissidents seek broad shareholder support through a public solicitation of proxies and management has the luxury of responding to the dissidents' campaign, are in the minority. A greater number of "stealth" proxy contests occur each year in Canada where incumbent management is often taken by surprise.
In stealth proxy contests, dissidents privately solicit votes from a handful of significant shareholders without canvassing broader shareholder support through a public solicitation. Generally, stealth campaigns will solicit proxies from no more than 15 shareholders, exempting dissidents from the usual requirement under Canadian laws to publicly file and deliver a dissident information circular when soliciting proxies. Often, target management will become aware of a stealth campaign only when dissident proxies are filed, commonly 48 hours before the meeting, but sometimes at the meeting itself. With scarce time to counter the dissidents' solicitation, these stealth contests are often effectively won by the dissidents before management even becomes aware of their existence.
Who launches stealth campaigns? Often they're spearheaded by hedge funds and other short-term activist institutional investors (frequently abetted by disgruntled former executives who retain significant personal shareholdings) seeking to push companies to enhance value through strategic transactions or to unlock value by selling non-strategic assets or freeing up cash reserves for dividends. In other cases, the dissidents' goal is more mundane: simply a cashless take-over.
Canadian issuers may be increasingly susceptible to stealth proxy contests in 2010, ironically as a result of two well-intentioned trends towards greater direct shareholder engagement and better corporate governance practices.
The first trend involves the recent removal of the ability for NYSE member brokers to vote shares beneficially owned by clients at the broker's discretion – without specific instructions from those clients – in uncontested director elections for US and Canadian companies. Canadian issuers that have historically had a significant percentage of their shares held and voted by NYSE member brokers, therefore, may receive reduced support for their board nominees.
The second trend is the growing influence of voting recommendations from proxy advisers, such as RiskMetrics and Glass Lewis (whose institutional investor clients are believed to hold between 20 to 30 per cent of the shares of most large- and mid-cap North American issuers). These recommendations are based on issuers' compliance with annually published corporate governance and executive compensation criteria, and "no-vote" or "withhold-vote" recommendations are not uncommon. Although RiskMetrics and Glass Lewis employ a different analysis when making recommendations in proxy contests (which considers the positions of management and dissidents), in stealth contests these firms often won't have time to change their recommendations or have their institutional clients act upon such changes. Accordingly, "no-vote" or "withhold-vote" recommendations may encourage stealth campaigns and even ensure their success, despite the dissidents' aims possibly being very different from RiskMetrics' and Glass Lewis' clients.
How can issuers protect themselves from stealth proxy contests? Effective ongoing shareholder engagement is a good first step. This can alert issuers to shareholder discontent and allow management and directors to preempt some shareholders' concerns. Where danger signs persist, consider undertaking a more proactive management proxy solicitation campaign by engaging a professional proxy solicitation firm to improve participation. It also pays to be onside of the governance and compensation policies of the leading proxy adviser firms to avoid "no-vote" or "withhold-vote" recommendations. Issuers should set a deadline for submitting proxies several days prior to the meeting and monitor proxies daily as they come in. The issuer's corporate secretary, registrar and transfer agent, investor relations personnel, counsel and an experienced meeting chair (possibly advised by independent counsel) should be ready to respond to the first signs of a stealth proxy contest. Finally, where a stealth proxy contest is suspected, consider adjourning the meeting to allow a reasonable time for public solicitation of proxies by both sides and/or to permit confidential negotiations with dissident shareholders on potential compromise slates or compromise resolutions.
Care should be taken by issuers, however, not to overreact to the prospects of a stealth proxy contest by adopting heavy-handed tactics that interfere with shareholders' voting rights. In its 2009 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; and the OSC sent a strong message that using tactical scheduling to frustrate the ability of shareholders to vote on a major matter would not be tolerated.
With a little preparation and good shareholder communications, however, issuers may avoid being blindsided by stealth proxy contests.
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.
