Crescendo Partners Chairman and CEO Eric Rosenfeld has called Canada "an activist investor's paradise." He told Bloomberg TV earlier this year that "Canadians are nice, maybe too nice" and that's why U.S. activists are increasingly coming north of the border in search of new targets.
Mr. Rosenfeld is partly right; Canadians do have a different sensibility and tend to approach conflict in business with less aggression than their U.S. counterparts. But that is not what is attracting US activist investors to Canadian companies; there are far more tangible advantages for activists found in Canadian corporate law and securities regulations:
- Activists in Canada can accumulate a much larger position in a stock without giving notice. The early warning threshold in Canada is 10 per cent, compared to just 5 per cent in the U.S. Granted, the Canadian Securities Administrators is proposing to lower the threshold to 5 per cent. For the time being, however, activists in Canada will be able to take a larger position in an issuer anonymously, preserving the element of surprise.
- Canadian rules allow an activist to solicit votes from up to 15 other shareholders without issuing a proxy circular. They can do so behind closed doors, without declaring their position, strategy or slate.
- While Canada has instituted "advance notice policies" that require shareholders to provide notice before nominating alternative directors, many Canadian companies still allow directors to be nominated from the floor of an annual meeting, thus opening themselves up to an ambush.
- In Canada, shareholders with only 5 per cent can requisition a special meeting; under Delaware corporate law, for example, the threshold is considerably higher.
- Canadian directors must stand for election every year, whereas US boards can be staggered and thus more difficult to gain effective control via a single proxy fight.
Over the past several years, Canada has seen an increasing number of high profile U.S. activist campaigns: Pershing Square's successful action against Canadian Pacific Rail; Jana Partners campaign against Agrium Inc.; Highfields Capital and Scout Capital's pressuring of Tim Hortons; and Orange Capital's campaign against InnVest REIT, among others. Canada also has a number of homegrown activists, including West Face Capital, which has targeted Maple Leaf Foods, Talisman Energy and SNC Lavalin, and relatively new entrant Smoothwater Capital, whose first campaign targeted Genesis Land Developments Corp. last year.
On a global basis, activism as an asset class has been an exceptional performer. According to a 2013 CITI Group report ("Rising Tide of Shareholder Activism"), activist hedge funds outperformed their non-activist peers and market indices, generating a nearly 20 per cent annual return since 2009, relative to 7.5% for hedge funds as a whole. Consequently, the capital available for activist fund managers to deploy has grown significantly; they are leaving no stone unturned to identify their next target, and many are expected to set their crosshairs on Canada.
Given this increased risk, what should Canadian companies be doing to ready themselves for a potential activist investor?
Know your shareholders. This may seem like basic investor relations, but far too many issuers do not take the time (or invest the resources) to frequently and accurately inventory their shareholder list. In the normal course, it's important to keep track of who your large holders are and what their intentions and expectations are. In the context of a proxy challenge, this is critical. What's more, the shareholder identification exercise will help build relationships and may surface potential unrest before it's too late.
Tell your story, early and often. A proxy fight is about competing visions; who has the best plan for creating value and who does the best job of articulating that plan to shareholders in advance of a vote. Making your case to a large shareholder for the first time during a proxy fight is next to impossible, in part because it's a good bet the activist has already paid them a visit to make its case for change.
Take a long, hard look in the mirror. Activists exploit flaws, however tangential, to create leverage. They may not care about governance, but they will use perceived weaknesses in this area to reinforce a broader narrative that paints management and the board as dysfunctional, incompetent, and/or entrenched. An important step in activist preparedness is taking stock of potential vulnerabilities and either addressing them proactively or designing a plan to defend them in a fight.
What to look for? On the governance side, for example, activists will seize on a lack of separation between the chairman and CEO roles, poor board renewal and inadequate experience and/or inappropriate skillsets among directors, lack of director independence, and excessive executive compensation.
Include directors in your executive positioning program. In a proxy fight, you will be arguing that your slate of directors is better than their slate. Proactively positioning the strength of your directors can be advantageous, particularly if you have invested in this well in advance of a conflict.
This is not an exhaustive list by any means. But it illustrates that investing now in some basic activities can make a considerable difference in the face of an activist campaign.
Despite being relatively fertile ground, Canada was still only home to 6 per cent of activist campaigns globally in 2013, compared to 71 per cent in the U.S. (according to "Activist Investing Annual Review 2014"). Many expect that to change in 2014, and the sooner Canadian boards take notice of this risk and prepare themselves, the better positioned they will be to respond quickly and effectively.
Let's also dismiss the notion that Canadians are too polite. As Jana Partners Managing Partner Barry Rosenstein infamously ranted from the floor of the Agrium meeting last year upon losing the vote, "you are a Board that proved that if you play dirty enough, violate all precepts of good corporate governance, fair play, ethical behaviour, and democracy, you can still lose the campaign but then barely manufacture a victory..."
If you believe Mr. Rosenstein, we Canadians may have some fight in us after all.
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