This was posted by Paydirt13 way back. It has resurfaced recently as an important consideration.

Proxy battles: Canada’s shareholder friendly legislation

Market participants, having found a new way to effect change at Canadian companies, are unlikely to turn back.

Disgruntled shareholders in the U.S., looking to launch a proxy fight, can be forgiven for envying their Canadian counterparts.

That’s due to Canada’s shareholder friendly legislation which provides a unique tactic by which shareholders can launch a proxy battle. In Canada, shareholders have the power to requisition a shareholder meeting in between the annual general meeting of the company, says Walied Soliman, a partner in Ogilvy Renault LLP’s business law group.

“In Canada, a 5% shareholder can requisition a shareholders meeting—basically by sending a note to the board of directors—requiring the board to hold the meeting on whatever matter to which the shareholder is objecting,” says David Toswell, a partner in the M&A / securities group at Blakes. “For example, to replace the board, amend the corporation bylaws, to seek to require the board to replace the CEO, or [to address] executive compensation matters.”

Secondly, “in July 2008, the Canadian Securities Administrators conformed one of our National Instruments with the corporate statutes which were intended to make shareholder activism more shareholder friendly by allowing shareholders to solicit proxies without the need for a dissident proxy circular,” says Toswell.

“Under the new rules, there is a provision that allows a shareholder to solicit proxies by way of public broadcast or speech, or by way of a press release, without incurring the cost of preparing and mailing a dissident proxy circular to all shareholders.”

To Toswell’s knowledge, “No one has actually used this method to date, except on a recently completed fight involving Canadian Superior Energy Inc. In that instance, the dissident shareholder, a private equity fund in California, basically issued a press release and started soliciting proxies for the replacement of the board of directors, in advance of the record date for the shareholders’ meeting,” he says.

“That action brought pressure on the board of Canadian Superior, ultimately leading to a negotiated solution that saw the private equity firm nominate a majority of the directors elected at the Canadian Superior AGM.”

“There is another exemption to the general rule requiring a dissident information circular. Under corporate and securities legislation, dissident shareholders can solicit proxies from up to 15 shareholders without distributing a dissident information circular,” says Dan Chitiz, a partner in the litigation department of ChitizPathak.

This can be a very effective exemption to rely on if there are several large share block holders whose proxies can be procured, says Chitiz. Moreover, he says, “For shareholders who want to put a toe into the water, this legislation provides a method that doesn’t break the bank.”

The timing can be propitious too. “This [solicitation] can be done at any time prior to the cut-off date for submission of proxies, which can be as late as the eve of a shareholders’ meeting,” says Chitiz.

Results

There's no doubt, in the past few years the number of proxy fights has certainly been increasing says Toswell. "To give a sense of the statistics, in 2005 there were four proxy fights in Canada; last year [2008] there were 27, and in 2009, there were 20 through the end of July.

So how are the proxy battles playing out? Does the proxy fight actually result in major changes in the composition of a company’s board?

Statistics tell the tale: According to Toswell, in proxy contests for boards of directors in 2008 there were 27 completed battles. Ten resulted in management’s nominees being elected, 9 resulted in the dissident nominee win, and 8 resulted in a negotiated solution; in other words, the board and dissident reached a compromise which typically involves putting one or more dissident nominees on the company’s board.

Through July 2009, in 20 completed proxy battles, 8 company/management won, 7 in which the dissident won and in 5 there was a negotiated solution. “So, these numbers wash out pretty similarly to the year before,” he says.

A large number of shares are held institutionally; some institutions will, in effect, contract the vote out to a third-party advisory firm, the main firm being RiskMetrics, says Toswell.

“RiskMetrics traditionally will support management when it is a full slate versus a dissident slate. But when it is a short slate [where a dissident proposes one of two directors] in lieu of certain management directors, RiskMetrics has publicly stated that their inclination is to support the shareholder, since the shareholder has a vested interest, which again is leading to more negotiated settlements,” he adds.
 

Sectors and strategies

“I think it´s really a case of shareholders disgruntled with a company´s direction, be it share price, strategy, perceived conflicts of interests.

“From a company’s perspective it’s a significant distraction for both the board and management, with significant costs and I think that´s one of the reasons we´re seeing more and more negotiated solutions,” he says.

As to how the proxy battles are being conducted, Ogilvy Renault’s Soliman notes that “we’re just starting to see the use of private investigators, which is very controversial.”

In terms of lawyers’ involvement, Soliman notes that “at our firm we’ve noted a significant increase in the amount of litigation work in proxy fights. These are no longer corporate battles.”

What's ahead

How will proxy fights play out in the future? Soliman expects a growth in the number of proxy battles. “The cat is out of the bag,” he says. “Market participants have figured out a new way to effect change at Canadian companies and they will likely not turn back.”

Still, harkening back to HudBay and other proxy fights, Chitiz say, “HudBay is reflective of a growing shareholder activism which is the natural bi-product of volatile markets,” he says.

“Proxy fights are generally on the rise. The courts have shown an increased willingness to interfere with the business judgment rule to ensure shareholders are able to vote on a fully informed and timely basis as a means of protecting shareholder rights,” says Chitiz.

“This has resulted in a growing number of precedents that may well be laying the ground work for increased shareholder activism.”