Shareholder activism meets M&A

Most M&A tables list the buyer, the target and maybe the legal and banking help. But what about the activist? They can play a range of different roles—and potentially make or break a deal
By Poonam Puri
With Patricia Olasker

Finally, after months of negotiation, you have just issued a press release announcing the signing of an acquisition agreement to sell your company at a nice premium. Your biggest shareholder has signed a lock-up agreement committing to tender its 15% block. You’re about to turn over the deal to the lawyers and take a few days off to recover, when you get a call from one of your shareholders complaining that the deal price significantly undervalues the company…

SHAREHOLDERS IN CANADA are increasingly playing a central role in M&A. Activists can make or break your deal. In this column, we consider the impact of shareholder activists on recent Canadian public company board decisions and M&A outcomes. Shareholder engagement in the M&A context is taking many forms these days.

First is the activist or engaged shareholder who steps in—between the target’s board and an acquirer—to negotiate a better deal for shareholders than the target is able to secure on its own. A case in point is U.S.-based Rayonier Advanced Materials’ proposed friendly acquisition of Tembec Inc. announced in May 2017. Tembec’s largest shareholder, U.S.-based Oaktree Capital Management, used activist techniques to force an improved offer from Rayonier. Following an intense 10-day proxy campaign completed just days before the shareholders were set to vote in July, Oaktree was successful in convincing shareholders, as well as analysts, ISS and Glass Lewis, that the transaction was underpriced. This forced Rayonier back to the negotiating table. It raised its offer and Tembec’s shareholders blessed the deal.

Then there’s the activist as catalyst, one who pushes a reluctant or stubborn board to engage with a hostile bidder on a proposal that the board isn’t initially keen on. Take the example of Chemtrade Logistics Income Fund’s (TSX:CHE.UN) hostile bid for Canexus Corp. in October 2016, which the Canexus board initially snubbed. When Canexus’ largest shareholder, Stirling Global Value Fund, criticized the board, requisitioned a shareholders’ meeting and proposed replacing the entire board, Canexus was compelled to change its stance. Canexus engaged with Stirling and ended up negotiating a friendly deal with Chemtrade, a deal which Stirling supported.

Boards and management shouldn’t necessarily feel threatened by this type of shareholder engagement. Consider harnessing the power of the activist shareholder to support management’s efforts to get a deal through on terms favourable to the company. Such is the example of SunOpta Inc. (TSX:SOY) and Engaged Capital, its second-largest shareholder. SunOpta was negotiating a strategic investment with Oaktree in the fall of 2016, while Engaged Capital was agitating from the sidelines. What did SunOpta do? It got Engaged Capital to sign an NDA and brought it into the tent, effectively giving Engaged Capital a seat at the negotiating table. With Engaged Capital by its side, SunOpta achieved a better result for shareholders than it could have done alone. And, after the deal closed, a nominee of Engaged Capital was appointed to the board.

In a similar vein, shareholder activists can help stiffen a board’s resolve to reject an unsolicited bid. A case in point is Innova Gaming Group. When Innova was faced with Pollard Banknote Ltd.’s (TSX:PBL) unsolicited bid in April 2017, a bid which had the support of Innova’s largest shareholder, Amaya Inc., Innova’s board was keen to shake it off on the basis that the transaction was underpriced. Two of Innova’s shareholders, with a 21% collective stake in the company, also stepped in, each independently releasing public statements that they intended to reject the offer. These actions strengthened Innova’s position to hold out for the right price: Pollard was compelled to raise its offer. This goes to show that small, engaged shareholders can have a big impact.

NOT ONLY ARE activists reacting to others’ M&A proposals, they are instigating them in some cases. Activist shareholders might prod a board privately or publicly to conduct a strategic review process and pressure the company to consider going private. The activist might push for this when they are frustrated by a company’s continuing underperformance and lack confidence in the management’s ability to turn things around. Or when they are of the view that the underlying problems are so severe that going private is the only option. M&G Investment Management, Gibson Energy Inc.’s (TSX:GEI) largest shareholder, is an example. For two years, M&G had been pressuring Gibson to divest non-core assets. Ultimately, in August 2017, M&G sent an open letter to the chair of Gibson’s board, insisting that Gibson speed up the asset sale process and then commence a strategic review potentially to sell the company.

It’s not always the largest shareholders who act as instigators. Take the example of Jonathan Litt of U.S.-based Land & Buildings Investment Management with his minority stake of about 5% in Hudson’s Bay Co. (TSX:HBC). In a June 2017 open letter to HBC’s board, he called for the company to go private.

Acquirers aren’t immune to activist shareholder intervention, either. Hedge fund Paulson & Co. issued a warning at the 2017 Denver Gold Show to companies in the sector, citing the industry’s history of making overpriced acquisitions and warning that shareholders will intervene if the practice continues. Even without activist intervention, shareholders have collectively punished companies perceived to have made unwise acquisitions. Examples abound, but one of the most notable is McEwen Mining Inc. (TSX:MUX) which made two acquisitions in 2017. The market’s reaction was so negative that the company’s stock price was cut nearly in half.

REMEMBER, WHEN IT comes to M&A, management is often seen to be conflicted. It could either be perceived to have an incentive to block a beneficial transaction to maintain its position, or to be incented to approve a sub-optimal transaction by the allure of change of control payments or option payouts. Such conflicts create a natural role for activist shareholders to express the owners’ perspective by dissuading an eager board from selling too quickly or cheaply, or pressuring a reluctant board to consider selling the company because it will be more favourable for shareholders than the board’s long-term strategy.

So, what can boards do? They can either bear the brunt of activist opposition or proactively leverage activist shareholder support and collaborate to enhance deal value. Engaging shareholders from the get-go gives boards an opportunity to achieve better or at least more certain outcomes. To conclude, here are six tips for board-shareholder engagement in the context of M&A:

• Develop a plan or framework for engagement. A plan or a framework that sets out the board’s approach to shareholder engagement regarding deal-making, including when and how the board plans to engage with shareholders, is critical. Establish engagement processes for friendly and unfriendly transactions. Ensure that the board’s approach does not conflict with the company’s disclosure practices and policies. Get advice on managing selective disclosure and other legal risks.

• Engage early. Whether as buyer or seller, proactively seek input from your significant shareholders on M&A transactions, including on a bid that you plan to reject. Early engagement may lead to less activism. This is particularly important if you are subject to a hostile takeover bid because you do not want to be caught off guard by an activist shareholder under such circumstances. If you gauge that shareholders are likely to oppose your decision, share your rationale with them with a view to bring them on board before making your decision public.

• Plan a media strategy. Plan a media campaign around the transaction to get your message to the wider audience. Depending on the circumstances, it may make sense to go public with your story quickly so you can shape the narrative. Hire a top-flight communications strategist with experience in the M&A and activism space; a good one is worth the money. Work closely with your communications strategist to craft the messages and develop a well thought out campaign.

• Identify key shareholders and monitor any changes in investor ownership. While there is no ownership threshold for activism, larger shareholders are more likely to have a more significant impact on board decisions. Stay updated and monitor the company’s largest shareholders using stock-monitoring services, management briefings and proxy solicitors, if required. Be aware of shareholders’ stakes in the company and their investment strategies, rationales and track records. Proactively engaging with major new shareholders can help boards manage and reduce the risk of shareholder activism.

• Have the right team and be prepared. Carefully consider which members of the board and management team are best suited to engage with which shareholders on which transactions. To be adequately prepared, board members will often require additional information on the transaction as well as on the shareholders they are meeting and their interests and concerns. And, ensure that your team is well-apprised of what can and cannot be disclosed to shareholders to avoid selective disclosure and tipping.

• Listen. Importantly, your engagement team should really listen to the shareholders, with a goal of coming away from the meeting with a deep understanding of the shareholders’ criticisms, complaints and concerns. These issues should be immediately captured in writing and shared with the transaction team and discussed as a group.

Poonam Puri is an experienced corporate director, governance expert and law professor at Osgoode Hall Law School. E-mail: Patricia Olasker is a leading M&A lawyer and an adjunct faculty member at Osgoode.

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