“You need to groom your relationships with shareholders,” said Jonathan Lampe of Goodmans LLP speaking at a panel on cross-border M&As hosted by the firm. “I think there are a lot of companies out there if they spent some time looking at themselves, they would admit they are candidates in this environment.”
With the arrival of activist shareholder Bill Ackman in Canada, panel moderator and Ohio State University law professor Steven Davidoff kicked off the session with a discussion about the current climate for activists and how to deal with them.
“This topic is deeply in the minds of everyone in Canada and it’s because of Bill Ackman’s arrival in Canada,” said Davidoff.
At a Feb. 6 meeting of shareholders in Toronto, Ackman was critical of Canadian Pacific Railway Ltd. for falling behind its peers. Ackman and his New York hedge fund, Pershing Square Capital Management LP, which holds a 14.2-per-cent stake in the company (CP’s largest shareholder), was critical of the railway’s current board and its management team.
Ackman wants to see CP Rail CEO Fred Green replaced by former CN Rail boss Hunter Harrison. He also wants to see the company bring its operating ratio, which is seen as a measurement of management efficiency, down.
Aiming at management issues is a common target for shareholder activists. For the most part, activists in Canada have been driven not by merger-and-acquisition activity but more by issues around long-term strategic direction or a change in chief executive officer or senior management, according to the panel. In many cases activists are looking at underperforming companies.
“Shareholder activism is in a fairly well-developed state in this country and it is, to some degree, it is being applied in the same way in the U.S. but even more so,” said Goodmans partner Stephen Halperin. “It’s actually easier, from a legal perspective, to be an activist in Canada than it is in the United States. One reason is the complete ineffectiveness of staggered boards.”
Unlike in the U.S., Halperin explained, Canadian law allows shareholders effectively to recall directors at will, at any time, and it only takes shareholders with five per cent of company stock to do that and call for their removal.
A variety of factors can contribute to an activist being drawn to a company, such as a management change, or a board appearing to be out of sync with what’s going on in its industry.
“There are reasons activists pick the companies they pick,” said David Katz of New York law firm Wachtell Lipton Rosen & Katz. “It’s not just for underperformance, it can be something else. It can be a management change or the board may be perceived to not be on top of things the way they should be. Look at your company as if you were an activist. If you don’t, you might get caught unaware and it can hurt you from a credibility standpoint with your shareholders.”
While it might have been the policy 10 years ago not to engage activist shareholders, times have changed and panellists advised that it is in the best interest of a board to be proactive and pre-emptive, and engage shareholders regularly and “get them on the same page.” Even if there are dissenters, if you can have an open discussion about what’s going on, there is less chance of an activist taking root.
“Try to meet, greet, and engage, and listen — hear them out and see whether there is a deal to be done or a dialogue that can build a relationship. Don’t stiff-arm the activist and force them to go public,” said Halperin.
“It’s also a question of credibility, it’s not just the activist that you’re dealing with but how the other shareholders line up in the process,” said Lampe.
Katz put forward the idea that companies are in a much better situation if they are prepared to engage with the activist early on, with a plan approved by the board, especially if someone comes with an agenda of items they want addressed.
“How does it look to your shareholders if you choose not to engage and simply stiff-arm somebody and they have a significant economic stake?” said Katz.
“You’re in a much better situation in any of these circumstances when you can go on the offensive when they come in with an agenda and ask, ‘Why haven’t you done this? Or why haven’t you done these six things?’ And you can sit down and go through what you have done. Sometimes the person will go away but at least you met with them on their agenda. It’s a powerful message to say ‘He did talk to us about his agenda and here are the 10 reasons why it doesn’t make sense and we explained that to him.’”
Panellists also advised companies to keep an eye on analyst reports that may provide fodder for activists to seize upon.
“One thing that can kick it off is a research report — an analyst flags issues and it gets picked up and it becomes a wave if you don’t deal with that early on you can get overwhelmed by it,” said Katz. “Where you get caught unaware is when you haven’t done anything.”
Davidoff said in the U.S. he is seeing that some companies are preparing for activists even before they go public.
“If you pick up any of the recent U.S. IPO prospectuses such as Facebook they are filled with dual class shares and staggered boards so clearly companies accept that they can take action outside the ISS process and I think they are preparing for shareholder activism,” he said.