Let them see you sweat

Think like an activist...be prepared...know your shareholders...earn their vote...expect the unexpected. These days, when it comes time for proxy season and your annual AGM, a little paranoia goes a long way
By Paul Brent

Vigilance and proper planning for likely skirmishes are now major components of proxy season preparation

Proxy season used to be a straightforward, no-drama exercise for Canadian issuers. True, it’s been a while since information and opinions traveled a one-way street from company to shareholder, when issues and director slates were put up for vote and pretty much everything on management’s wish list passed with nary a complaint. But lately the stakes and the tension and the pressures on issuers—thanks in part to battles at blue-chip names like CP Rail and Telus—have been seriously ratcheting up.

So much so, that vigilance and proper planning for likely skirmishes are now major components of proxy season preparation, says Orestes Pasparakis, a litigation attorney with Norton Rose Canada. “Proxy battles arise from shareholder frustration. A diligent board will take steps to recognize and address that frustration proactively so as to avoid the need for a contentious and expensive battle for control of the company.”

Based upon the raw numbers, many issuers are not doing enough to keep influential shareholders onside. “There are 30 proxy fights this year either announced or underway,” says Riyaz Lalani, chief operating officer of Kingsdale Shareholder Services Inc. of Toronto. “Those are the ones that the general public knows about. There are probably four to six where there is actually a dissident action that takes place, nobody knows there was an action, and you just see a press release that the CEO is going to spend more time with his family.”

What do shareholders and others focus on when they examine proxy circulars? Salary, for starters. That’s the conclusion of a recent survey of U.S. institutional investors and public companies by shareholder advisory firm Institutional Shareholder Services. Executive compensation headed the list of top governance topics for institutional shareholders, followed by board competence/director qualifications, and third, board independence. It also seems a number of issuers are getting the point. In a survey of U.S. public companies published in November by Towers Watson, 45% of 253 companies polled said they had either made or will make changes to their executive pay programs this year to strengthen links between pay and performance.

Not all of the fights cited above are linked directly to proxy season. But they’re indicative of the current mood and climate as most issuers enter the final stages of document preparation and strategizing in the run-up to their 2013 AGM. At one level, it’s still about distributing information, communicating with shareholders and keeping pace with proposed or mandated regulatory changes. But what’s different is that the centrepiece of every strategy should now be preparation for potential opposition, says George Kesteven, manager of corporate and investor relations with Calgary’s Sterling Resources Ltd. (TSX:SLG) and chairman of the Canadian Investor Relations Institute. “It has become much more interesting, if I can put it that way, and for some people very challenging because of shareholder activism.”


When it comes to specific agenda items for issuers to be on top of in the coming months, Kesteven points to a couple of important sets of changes to director voting rules for all Toronto Stock Exchange-listed companies.

The first, adopted in October and taking effect at the end 2012, require issuers to elect directors annually, individually and to publicly disclose the total of “for” and “withhold” votes cast for each director. “Slate voting is going out the door,” Kesteven says.

The second change, part of a package of proposed amendments to take effect at the end of 2013, requires issuers to introduce majority voting for uncontested director elections. Under this proposal, a director who receives a majority of “withhold” votes would be required to tender his or her resignation.

But adopting voting for individual directors comes with its share of questions, Kesteven notes.“What the regulators are now grappling with is how do you address the situation where an individual director gets more withhold votes, which is the polite term, than affirm votes? What is the consequence of that kind of vote?” The current thinking is that the chair of the board could keep that individual director on, but the board would have to justify it publicly in some form of communication with shareholders.

The TSX proposal that would require majority voting on individual directors by the end of 2013 will make their decisions easier. Then it’s largely just a matter of counting the votes. Perhaps that’s why many of the country’s biggest companies have already made the move. According to the Canadian Coalition for Good Governance, 61% of listed issuers in the S&P/TSX Composite Index have already adopted majority voting.

The Institute of Corporate Directors, with 5,000 members across the country, supports mandatory voting for directors individually, but is opposed to mandatory majority voting, concerned it could create crises should entire boards fail to win support.


Since the financial crisis and market crash of 2008 and 2009, shareholder dissent and activism has been rising. And it’s not just index heavyweights that are feeling the wrath of unhappy shareholders. Lost in the dust of the Canadian Pacific Railway (TSX:CP) fight late last spring, for example, was the successful dissident assault on junior energy company Alberta Oilsands Inc. (TSX-V:AOS) just one month later. A shareholder group led by a former director successfully ousted the existing board of directors of the penny stock energy producer. The group, which held about 2% of the company’s stock, was granted an exemption from the requirement of the Alberta Securities Commission to send a proxy circular to all shareholders or issue a public notice because it planned to contact no more than 15 other shareholders to solicit votes for its alternate board nominees.

“Every single board member was replaced there,” says Glenn Keeling, managing director of CST Phoenix Advisors. “It was a smaller-cap company, poor management and board behaviour, poor performance, and the next thing you know they are all out of jobs.”

This U.S.-style investor activism has been the result of issuers’ halting steps to adopt corporate governance initiatives and unpredictable markets, says David Salmon, senior vice-president with Laurel Hill Advisory Group in Vancouver. “The economy is not very strong and people want to squeeze out returns any which way they can.” That has attracted not only impatient U.S. funds but also the homegrown likes of shareholder activist firm West Face Capital and even formally staid institutional shareholders such as the Ontario Teachers’ Pension Plan.

Observers can be excused for thinking that it would be the U.S., rather than Canada, as the hotbed for proxy skirmishes. Not so, says Salmon. “The Canadian jurisdiction, legally speaking, is much more friendly than the U.S.” to activism by shareholders against management. “You can requisition meetings up here, you can request shareholder proposals and also shareholder rights plans if you are going to make a bid. You can just say ‘No’ in the U.S., where in Canada you just buy yourself 60 days and then they apply to the commission to have it cease traded,” noting a proxy battle that was launched just the day before. Salmon estimates activists have been successful in about 50% of the fights they have started with issuers.


So just what can issuers do to try and minimize the chances that their company’s future doesn’t play out poorly in the financial pages?

Start by taking the same steps an activist would take, says Walied Soliman, a corporate lawyer and colleague of Pasparakis at Norton Rose. “What we have been advocating with issuers that have been retaining us across the country is to be even more prepared—to understand who your shareholder base is, to understand if you come under attack who will be speaking to whom, when. Who will be your lawyers, will be your proxy solicitation firm, who will be your communications adviser.

“Responsible issuers are all preparing proxy defence playbooks just as we have been, for decades, preparing takeover bid playbooks for companies,” he says. “Shareholders are expecting that their directors will be ready.”

Another tip: as any predator, or potential prey would advise, be aware of your surroundings. That’s the first-hand wisdom of Wayne Moorhouse, chief financial officer of Vancouver-based Roxgold Inc. (TSX-V:ROG). The mining industry executive has actually been through two proxy fights—the first with Genco Resources Ltd. in 2008, followed by a fall 2012 proxy tussle at Roxgold that saw a major shareholder overturn the board and bring in a new CEO—this at a company that was ranked No. 1 on the TSX-Venture 50 in 2011. “I can say from both places where I have been that if I had known everything before the proxy fight that I knew after the proxy fight just from the people internally, it would have been a lot easier to see it coming,” he says. “You have your corporate development guy not talking to your IR guy, not talking to your CFO, not talking to your CEO.”

The Roxgold CFO says that companies that are potential targets for a proxy fight are those that are clearly underperforming and likely have a disgruntled shareholder base as well as those that have great assets or have a cash-laden balance sheet.

There is some good news for issuers concerned about activist sneak attacks, specifically the use of an advance notice bylaw which sets a specific time, built into the company’s bylaw or charter, which forces any outside group looking to put forward outside nominees that they have to give notification. That can give an issuer a breathing period of 60 to 90 days prior to the meeting, says Salmon. “You can no longer do that stealth takeover, soliciting less than 15 shareholders, use the solicitation exemption, show up and make a nomination from the floor. This advance notice bylaw is something that should be known by issuers out there.”

Vancouver’s Mundoro Capital Inc. (TSX-V:MUN) pioneered the use of the advance notice bylaw this year, on the advice of Norton Rose. “It is simply one of the tools for an issuer to defend or protect itself,” says Soliman.


Preparing for an incident-free proxy season and annual meeting actually starts the year before in the run-up to that AGM, advises GST Phoenix’s Keeling. “Frankly the higher vote you can get, the less likely you are to be a candidate for a takeover. If you get a healthy vote, that will certain dissuade certain people from taking a run at the company.”

While issuers can easily identify and stay close to their institutional shareholders throughout the year, they don’t do a good job with retail shareholders, says Keeling. “We are now asking our client organizations to take better action and we are trying to help structure programs for them so they can have outreach programs to their shareholders—not to ask for a vote throughout the year but to let them know they matter.”

There are a number of best practices that issuers should be following when it comes to the proxy season and dealing with potential activists. Just knowing who owns the company’s stock, for example, could prove to be critical. Kesteven, the CIRI chairman, notes that his organization has long been pushing for the identification threshold for major shareholders to be lowered from the current 10% to 5%, which is the percentage used in most other jurisdictions including the U.S.

“One of the big issues in Canada is the whole question of shareholder identification, the ‘NOBO and OBO’ situation,” he says. Issuers can get a list of non-objecting shareholders who own their stock (and have given a financial intermediary permission to release their name and address) but have little chance identifying ‘OBOs,’ those who choose to be counted as objecting beneficial owners, remain anonymous and often, “who want to go and lie in the weeds,” he says.

Kesteven has some pretty simple advice for other issuers gearing up for the proxy season. “The first is to stay in touch with your shareholders, particularly stay in contact with and have alignment with your major shareholders.” At his company, three major institutional shareholders account for about 40% of its shareholder base. The IR head and other officers of the company are in regular, weekly contact with those big shareholders.

He also advises issuers to maintain contacts with trading desks. “They are an extraordinarily valuable source of information,” he says. “They can’t identify who the specific parties are, but at least directionally they might be able to point us in the right direction and I can then figure out on my own who is trading my stock.”

The good news on this front is that it is getting easier for issuers to identify just who holds their shares. “Eight years ago it was easier to figure out who owned your shares, then we had this five-year window when it got really, really difficult, and it is starting to come around again,” says Chris Makuch, vice-president of national sales and marketing with the proxy solicitor Georgeson Canada. “It has become a little easier, so issuers need to take advantage of that and seize the moment.”



Technology’s the story in back-office proxy processing and, increasingly, in shareholder voting

Out of sight and often overlooked, Broadridge Financial Services acts as the back office for the proxy process. With a market share greater than 90%, the U.S.-based company is often characterized as having a virtual monopoly when it comes to delivering proxies. It is also uniquely positioned to observe how the process has changed over the years and how it might evolve.

Patricia Rosch, president of Canadian unit Broadridge Investor Communications Solutions Inc., notes that two new issues facing companies for the 2013 proxy season are the Ontario Securities Commission changes concerning communication with beneficial shareholders (rule 54-101) and the introduction of notice and access in the Canadian marketplace. Notice and access, introduced in the U.S. in 2006, allows issuers to post proxy materials online and notify shareholders by mail that the material is posted and how they can access it, rather than sending out a full proxy package. “Notice and access is definitely something that corporate issuers should be aware of,” she says.

Mobile technology is also changing the voting dynamic. In 2011, Broadridge introduced a mobile proxy voting application that raised voting rates among retail shareholders from 5% to 21% in the U.S. It was introduced for Canada last proxy season.

Of the one million shareholders in the U.S. and Canada who have used the mobile app to date, one-third of those are first-time voters, says Rosch. They are also usually management allies. “Typically retail shareholders are long-term owners and they also have the inclination to support management’s positions, on such topics as executive compensation. With the introduction of say-on-pay in Canada that is another key button, so management, by encouraging the retail vote, is not only going to be helping participation but there is some benefits for them as well.” —P.B.

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