Last year was a busy one for shareholder activism in Canada. This was particularly true for companies in the mining industry, which reported the highest number of proxy contests of any major industry sector. Roxgold Inc., Baja Mining Corp., and Maudore Minerals Ltd. are just a few examples of Canadian mining companies that were targeted by activist investors seeking to make significant changes to their business.
In Roxgold's case, a group of dissident investors successfully used the proxy mechanism to replace the company's entire board and CEO. In light of these developments, some observers have speculated that we may be witnessing the emergence of a bold new era of shareholder activism in this country.
Proxy contests, shareholder proposals, and shareholder-requisitioned meetings can all be powerful tools for corporate change – particularly when they take the company by surprise. A consistent and proactive approach to shareholder engagement is the best protection against shareholder activism. The more alert and responsive a company is to developments in its market and the concerns of its shareholders, the better positioned it will be to deal with any activist investors.
Canadian Pacific Railway's experience in its recent high-profile proxy battle with U.S. hedge fund Pershing Square is instructive. Pershing Square's campaign to shake up CP's leadership was based on years of unsatisfactory share performance and declining profits. Blaming poor management and inadequate board oversight, Pershing Square sought to nominate new board members, with a view to changing the company's leadership and implementing better corporate governance.
While negotiations with CP's management and board began almost immediately, they soon broke down. Pershing Square then resorted to the proxy mechanism and took its proposal for change directly to the shareholders. In this case the move paid off. Pershing Square won the support of several of CP's biggest institutional shareholders, including the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan. CP was forced to capitulate – its CEO stepped down and its slate of directors did not stand for re-election.
This case demonstrates that companies who ignore activist investors do so at their peril. Had CP been more persistent in its efforts to negotiate with Pershing Square, the outcome might have been different. The defection of several of CP's institutional investors underscores the importance of communicating with shareholders and responding to concerns.
When confronted with an activist proposal, a company's best defence will often be a good offence. An effective shareholder communication strategy requires foresight, preparation and listening carefully to shareholders' concerns, to ensure they are adequately addressed in the business plan. The company should clearly communicate a solid business case to its shareholders. It should be able to explain and defend its strategy.
It helps to keep proper business and accounting records, so the company can document its business case and strategy to its shareholders. It also helps to keep accurate records of shareholder communications – email can be a useful tool for that. Companies that take the time to groom their relationships with their shareholders stand a better chance of maintaining their support.
As a pre-emptive measure, companies should consider adopting bylaws or policies requiring shareholders to notify the company before a shareholder meeting of proposals to nominate directors. If properly implemented, these can greatly reduce the risk of the company being taken by surprise at a meeting. Last summer, in Northern Minerals Investment Corp. vs. Mundoro Capital Inc., the British Columbia Supreme Court upheld such a policy, finding that it did not undermine shareholder democracy or infringe shareholders' rights. Such a policy, and a robust approach to shareholder engagement, can be the bases of an effective defence to a potential activist campaign.
While each company must decide how best to anticipate and respond to shareholder activism, one thing is clear: companies that are prepared and proactive in their efforts to communicate their business plan to shareholders will be in the best position to manage any challenges from activist investors.•
Stephen Antle is a partner in the Vancouver office of Borden Ladner Gervais LLP. Bill Woodhead is an associate with BLG. Eric Little is an articling student with the firm.
