The art of war has changed for shareholders and the companies they’re looking to bring down or take over. The weapon of choice for many: proxy fights. “Three years ago this practice area really started taking off. People thought it would be the new mergers and acquisitions. Time has shown it’s taken its place with M&A,” says Walied Soliman, a partner with Norton Rose OR LLP in Toronto.
“It’s useful because it’s cheaper than buying [shares],” notes Jeff Barnes, a partner in Borden Ladner Gervais LLP’s Toronto office. “You may be able to change the direction of the company without having to buy stock, [and] there has been less cash available over the last few years.”
Indeed, the shifting legal landscape reflects the shifting economic landscape. “The whole concept of shareholder activism leading to proxy battles is now an established feature,” says Pat Koval, a partner with Torys LLP in Toronto. “For companies, if they dismissed the idea of proxy battles in the past, they shouldn’t now. Activism is here to stay.”
Success on either side depends on developing a winning strategy, and many elements of the battle plan have changed. There are, for example, full and partial takeover bids. “It’s a mixed strategy. That’s fairly new in the market,” says Barnes. “A lot of the people doing that are hedge funds. They may be looking for a relatively quick change in the business.”
Also new in the arsenal: the scorched-earth approach. “In this regard, a dissident says whatever they want to put pressure on a management team. As a public company, a management team and board are limited in what they can say sometimes due to appropriate disclosure rules, and so may have a harder time responding to negative comments on strategy from a dissident,” explains Chris Makuch, vice president of national sales and marketing with Georgeson Inc., a proxy solicitation firm in Toronto.
The strategy, while somewhat dubious, does have one likely outcome, he adds. More litigation. “My sense is that litigation lawyers are now becoming part of the deal team in a battle from the very beginning. That implies that people expect to have litigation as part of the process and even if it does not happen, documentation and information retention and planning are part of the process now.”
“In my world,” notes Tim McCafferty, a partner with McCarthy Tétrault LLP in Vancouver, “litigation was always part of the mix. The law is somewhat murky in this area, and litigation is always a tactical strategy.” Litigation is a double-edged sword, says Brad Allen, senior vice president with the Laurel Hill Advisory Group Co., another proxy solicitation firm. “It is a valuable tool to have ready to be employed selectively both offensively and defensively.”
Offensively, he notes, it can be used to keep dissidents’ “feet to the fire” with respect to the process and regulations surrounding proxy solicitation as well as providing guidance on press release concerns. Defensively it can minimize risk of procedural error.
The pace and the pressure of a proxy battle requires a flexible plan and the experts to implement that plan successfully, says Koval. “Proxy contests are often won by very narrow margins. You need to think strategically all the time, and you need a well-organized team with clearly defined roles.” A critical step, she adds, is acquiring information. “Find out as much as you can about your shareholders. It’s finding out who has the vote, knowing where the shares are, and where they’ve moved to. In the background, be thinking about settlement strategies.”
This new battlefield comes with an increasing number of white flags. “Boards are more willing to settle,” says Soliman. “That’s in everyone’s interest. They reach an accord that recognizes the rights of the dissidents to participate in some way at the board level.” That accord may be hindered or enhanced by media attention. “The trick is to use the media within the rules. Both sides are hiring publicists at this point,” says Orestes Pasparakis, another partner with Norton Rose in Toronto.
“Media is still a big part of the process in terms of newspaper ads and articles, but social media is really the next opportunity to increase participation in proxy battles,” notes Makuch. “Taking the fight directly to the shareholder is key, and the ability to mobilize shareholders over the Internet could be a game changer in some cases.” The press is more integral to the war strategy than ever before, agrees Barnes. “Computerization isn’t working really well to get information into people’s hands. If you’re really having a proxy battle, you’ll have most of it in the press. They’re usually really interested and the only way to reach retail shareholders. The media will have a big role, and lawyers have to get themselves comfortable with that,” he says.
The new proxy battlefront and the technology combine to enable camps on both sides to engage the media very rapidly. “One of the first pieces of advice I give to clients is to hire a media specialist,” says Koval. “You need tight, consistent messaging that can get out as quickly as possible. . . . Winning a proxy battle is all about winning the hearts and minds of your voters.”
Another central player in the fight: advisory votes. The issues are threefold, says Makuch. “First you want to get the proxy advisory firms onside and depending on whether you are dissident or management, the way you approach the proxy advisers can be different. Once you have their support, you should have some momentum from the votes they have direct voting authority over, but at the same time, with these proxy battles, many institutions will take a harder look at the circulars than just leaving their vote to their advisory firm and possibly vote them themselves,” he notes.
“Finally,” says Makuch, “the proxy adviser recommendation — when positive for your side — can mean a bump in retail votes because you can tell retail shareholders that an ‘independent third party who reviews proxy circulars for corporate governance issues’ recommends shareholders vote your way.”
The firms can play a very significant role in the outcome of some proxy fights, says Allen. “A large percentage of institutional shareholders subscribe to vote recommendation guidance from these firms. Discretionary vote authority for these firms to automatically vote their subscribers’ shares are a much smaller percentage,” he notes, “but they can still have an impact, especially if the issuer typically has low vote response.”
What is undoubtedly increasing is lawyers’ interest in the field. “It’s become a sexy area,” says McCafferty. “A lot of corporate lawyers are figuring out this is just another meeting. But it isn’t. There are so many tricks and traps and nuances and strategies. We’ve seen a lot of mistakes over the last few years from people who are dabbling in this area.”
“The practical point for counsel is that this is a Byzantine area of the law,” says Pasparakis. “There are lots of rules. You need to spend time to understand how this works. It’s not taught in law school except at a theoretical level. Until you do it, you don’t really understand how it works on the ground.”
And it is on the ground where the battle plays out. To the bitter end.