Enter a Jan. 28 press release from Coalcorp, proudly announcing, “Independent proxy advisory firms recommend shareholders support Coalcorp’s proposed transaction.” The announcement outlined that both the Institutional Shareholder Services Inc. unit of RiskMetrics Group and Glass Lewis & Co. had released reports advising shareholders to back the deal with Goldman Sachs.
Despite some shareholders complaining that Coalcorp could have sold the assets for a much higher price, a majority voted to approve the deal on Feb. 11. While it’s impossible to know what influenced shareholders’ decisions that day, experts are increasingly pointing to the pull of the proxy advisory services in these types of battles.
Although the services are making their mark on a wide range of shareholder votes in Canada, including mergers and acquisitions, few in-house lawyers here seem aware of what they do. These proxy advisory firms, whose services are mainly used by large institutional investors, carry out lengthy research and analysis of a full slate of issues shareholders vote on. They weigh in on everything from governance issues, such as whether to support a slate of directors, to the viability of corporate transactions. And while most experts won’t say institutional investors blindly follow the proxy advisers’ edicts, all agree the opinions are powerful.
Leslie O’Donoghue, chief legal officer and senior vice president of business development at Calgary’s Agrium Inc., an agricultural products and chemical products company, says proxy advisory services are playing an increasingly noticeable role in contested proxy-related matters in Canada. They have a particularly loud voice when it comes to contested director battles, which often arise when the directors of a company targeted for a takeover are up for nomination, and the acquirer proposes an alternate slate. This is a key step in contested mergers, says O’Donoghue, as both sides seek control of the company’s decision-making structure. “You’ll find that a lot of the indexed funds, and many other shareholders, really look to the advisory services, and I wouldn’t say follow it routinely, but take them seriously into consideration in determining the manner of their vote.”
That means dealing with the proxy services becomes a vital aspect of most proxy battles, but these battles are not won solely based on which side is backing the perceived “better directors.” Attention must also be turned to valuation, which creates a significant role for financial specialists in demonstrating that the offer is compelling and strategic, says O’Donoghue, and the advisory services are keen to scour those details. “So your preparation is all about presenting your case, presenting the valuation metrics, staying in very close contact with the advisory services, launching a very aggressive and compelling — from a communications standpoint — campaign with the target’s shareholders.”
McCarthy Tétrault LLP Vancouver partner Richard Balfour has been involved in a long list of deals on which proxy advisory services have weighed in and says one of the most important things on in-house counsel’s to-do list during a transaction should be a meeting with representatives of such services. This will allow the company to get its story in front of the service, and hopefully help improve its view of the company and its position on the proposed deal. However, the proxy services typically guard their independence, which can make it hard to land a meeting, says Balfour. But if nothing else, he says, some face time with representatives can ensure the information they are relying on is accurate. “Sometimes there’s a concern that, do these guys actually spend time analyzing things?”
Balfour also recommends immediate contact with large institutional shareholders once a potential deal has been announced. The communication should be used to explain why the transaction makes sense, and hopefully help demonstrate the advice that may subsequently come from a proxy advisory service is just that — an option that may or may not make sense for them.
Craig Thorburn, an M&A partner at Blake Cassels & Graydon LLP’s Toronto office, is one person who believes many large institutional investors vote in line with RiskMetrics’ recommendations by default. “If the recommendation, from your perspective, goes the wrong way, you’ve got a lot of work to do with your principal institutional shareholders.” While the urge may be to plan a response should a negative opinion come forward from a proxy advisory service, Thorburn says by that time it may be too late.
Management of companies that may be targeted must constantly work at building strong relationships with shareholders if they hope to gain a positive recommendation down the line, he says. It’s wise, for example, to meet quarterly with institutional shareholders after financial figures have been released. Such meetings are often facilitated by investment banks. “It provides a forum . . . to answer questions and talk about things that are in the public disclosure documents, and the like. That’s an ongoing process that’s really a multi-year process,” says Thorburn. “You are best placed, as a company, if your CEO and CFO already have good working relationships with the principal shareholders. If you have those doors that are already open, you’ve shown yourself to be responsible quarter after quarter, and if there are problems in the business [and] you’re explaining them in a way that satisfies the major shareholders, then you’re much more likely to have a sympathetic ear when it comes to dealing with a RiskMetrics or an ISS recommendation that goes the wrong way.”
While RiskMetrics — which is considered the main player in the field in Canada — often weighs in on controversial deals and shareholder votes, it too has been the target of controversy. Some have voiced concern that the organization offers both proxy advisory services to aid shareholders, as well as providing consulting services to issuers. So, for example, it will make recommendations on the basis of a company’s compensation plan, but will also help a company develop a compensation plan for a fee. While RiskMetrics has structures in place to avoid any conflicts — including a strong separation between its different branches — some critics say it is misguided to offer both types of services.
Balfour suggests companies are concerned about this perceived conflict. He says that while the services “notionally have a Chinese wall” separating the consulting and proxy advisory branches of their operations, the combination of services offered may seem unsavory. “It strikes you as odd that if a company is planning to put in place, let’s say, some kind of a compensation plan, it has to go before shareholders at an annual general meeting, the company would probably like to get a sense of what’s important to RiskMetrics and what isn’t when designing their plan, in terms of getting a favourable review by RiskMetrics,” he says. However, he notes that RiskMetrics offers no guarantee that a plan its consulting operation creates will be backed if it goes to a vote. “So even though they’re charging you for reviewing the plan, they can’t guarantee what the advisory side of their business will actually recommend to shareholders. It does raise some real conflict issues.”
O’Donoghue, meanwhile, says she is not concerned about such alleged conflicts. She suggests the fact RiskMetrics continues to offer varied services suggests the market is satisfied with the independence of its work. “Because it’s their business, and ultimately if there’s any perception that they’re not independent, I think their value diminishes substantially.”
Patrick McGurn, special counsel at RiskMetrics in Rockville, Md., says the organization has erected firewalls that prevent any potential conflicts. As mentioned, those efforts begin with a separation of employees within the organization dealing with the corporate advisory business and those working on the research side and issuing recommendations. This includes separate physical staff, separate computer systems, and no direct communication between the different wings of the organization. RiskMetrics also has a blackout period, which means as soon as a matter is open to the research process, workers on the corporate advisory side are no longer able to address it, says McGurn. The organization also provides access for institutional clients to information on any services provided to a corporate issuer.
McGurn suggests the organization’s long track record is proof positive of its ability to adequately guard against conflicts. “Given the fact that we’ve been doing this for going on 15 years or so, I think it’s pretty clear that our institutional clientele have that information available to them and it doesn’t, again, have implications for a decision to continue to purchase our research services.”
The visibility of proxy advisory services is likely to continue to grow in the year ahead if O’Donoghue’s predictions prove accurate. As Canada makes its way out of the recession in 2010, she expects to see a significant amount of consolidation arising in the marketplace, both domestically and internationally. That means more and more corporate counsel will be called on to help lead their teams through the merger-and-acquisition process. And while counsel will need to form a plan to put their best foot forward for the proxies, there are a wide range of other considerations when navigating an M&A deal.
George McClean, vice president and general counsel of Acklands-Grainger Inc. in Richmond Hill, Ont., has been involved in a slew of M&A deals as a member of a steering committee with the industrial supplier and in his previous role as counsel to General Motors of Canada Ltd. He says it is crucial for in-house counsel to serve as a trusted adviser and reasonable negotiator during any transaction. That takes a strong effort to integrate into the business side of the company, rather than focusing solely on the legal issues surrounding operations. Counsel must “really understand the business rationale, the valuation thesis, the synergies, and be able to articulate all of those and therefore be able to represent the company both at the preliminary stages, and then through negotiations, and closing,” he says. “And then, even beyond that, into integrating the businesses.”
But McClean acknowledges in-house counsel can feel a little lost in the process, especially if the company fails to identify an individual businessperson to take the lead from start to conclusion of a transaction. In those cases, he urges counsel to advocate for the installation of such a person to take ownership of the deal. This “business lead,” as McClean calls it, will take charge of the new business entity once it is brought on board. That means they will come to the table with an eye on how everything will fit together once the new business is created.
The next key role for in-house counsel is acting as educator for the business team involved in the transaction. While counsel may assume all the players will understand what common terms like “due diligence” mean, it’s important to outline exactly how it will shape the creation of transaction documents and help protect the company. “It’s really an exercise in educating in a straightforward way as to what the process entails, and what the benefits and risks are,” says McClean.
Other tips for in-house counsel new to M&A transactions include gathering knowledge — possibly from an outside law firm — on the anatomy of a deal, including materials such as asset-purchase agreements, non-competition agreements, transition-services agreements, and employment agreements. Once you have a handle on the general nuts and bolts of any deal, McClean says it is then time to key in on the specific issue most critical in the deal at hand. “Is it based on acquiring the customer base, or acquiring the assets, intellectual property — what is the core value?” he says. “So again, understanding why this is a valuable target.” Narrowing this down will allow the in-house lawyer to focus energy on the most important details of the deal.
Meanwhile, O’Donoghue says it’s crucial for in-house counsel to take a lead role in ensuring adequate communication between the deal team to reach the desired conclusion. That means establishing and enforcing a clear timetable for the transaction, a clear goal, and a risk profile. It can be an awkward position though, she says. “In-house counsel’s role is a hard one in many ways, because they are the person who is marrying the business advice, the business risk, the business strategy to the legal,” says O’Donoghue. “They’re front and centre.” At the same time, she urges in-house lawyers to refrain from trying to do too much in a transaction. Their job is to simply oversee everything that happens, she says.
