“We have the highest unemployment rate we’ve had in 20 years and the only province facing a decline in its GDP,” said Karen Wyke, a partner with Fasken Martineau DuMoulin LLP, speaking at the Canadian Corporate Counsel Association last week.
Wyke was part of a panel discussing recurring themes faced by in-house counsel in the current economic climate.
From the perspective of workforce reductions, Gulu Punia of Faskens said his clients have been dealing with mass terminations — defined in Alberta as 50 dismissals at one location and requiring four weeks notification to the government.
Other employers are asking employees to take voluntary pay cuts. In one case, a client asked its top 20 people to take 20-per-cent pay cuts. The typical concern is that a 20-per-cent cut would be considered constructive dismissal.
“It has to be a unilateral move — if they condone it, they can’t claim that. Some senior employees are willing to take the 20-per-cent cut, but if things rebound, I don’t want to be stuck with this so we’ve had clients enter into one-year agreements,” said Punia. “In some cases, companies will say they will reinstate and in others they promise in that year the employee can decide what happens.
“It provides certainty in that you can make the changes and not be holding your breath to see how many claims it’s going to result in,” said Punia.
He also noted that most Calgary employers have been making “reasonable offers” to employees who are often just glad to still have a job.
Pierre Magnan, general counsel of Parkland Fuel Corp., said he has heard of rollbacks to equity compensation, although “no one is talking about it.”
Another issue companies are dealing with is boards of directors worried about proxy contests.
“With Suncor’s recent acquisition of Canadian Oil Sands, we have seen that boards need to be prepared for contested transactions,” said Wyke.
For many companies — even those not in the energy industry — there is the issue of managing insolvent customers and aging accounts receivable. Workforce reductions add to the pile of concerns.
“The message is clear, in poor economic times what suffers is your stock price if you’re a public company,” said Christopher Wolfenberg, a Faskens partner in Calgary.
Some of the stock prices of the large E&P producers in Alberta are down 80 to 90 per cent in the last 12 to 18 months. That allows market entrants and interested parties to buy cheap stock if they’re willing to accept risk, but it also means certain shareholders have suffered great losses over time.
“Some parties, if they have held that stock, may be aggrieved and may be interested in taking a run either at the board level or at the company itself. For a variety of reasons, there will be either current shareholders or potential shareholders interested in acquiring more stock and attempting to influence the governance and direction of your company,” said Wolfenberg.
Wolfenberg emphasized the need for having a framework to help guide the process should a hostile takeover happen.
“I use the analogy of emergency preparedness. Have a safety manual that tells you what to do. Have a list of who to call when you get an unsolicited letter from a hedge fund in New York or investment banker in Toronto saying they represent XYZ and are ‘interested in nominating three directors at your next annual meeting . . . please meet with me and you have 48 hours to respond.’ That’s the typical approach,” he said. “It can seem as though the world is closing in on you.”
It’s important to establish an internal working group responsible for evaluating proposals received from third parties and co-ordinating a response as well as strategic communications. That working group should include executive-level advisers, board advisers, and the finance team.
“A lot of the arguments the third parties make when your stock is undervalued is that management is not doing a very good job, that the board is mismanaging management, and that there is additional value to be created,” he said.
Externally, make sure you have lawyers lined up to advise, but don’t let them tell you what to say.
“It’s important to have external advisers that are not solely focused on the law. It’s important to have advisers capable of understanding the market and communicating with the market,” said Wolfenberg.
In Suncor’s acquisition of Canadian Oil Sands, Wolfenberg said the target received advice more than a year in advance of the ultimate transaction.
“They were prepared, had a team in place, had advisers engaged, and had interviewed a number of firms,” he said.
A vulnerability analysis can also be useful to determine weaknesses and know who, exactly, the shareholders are and if they have acted aggressively in other circumstances.
Magnan said he gets approached by Institutional Shareholder Services Inc. and the other shareholder advisory firms, and all the issuers get scored and asked if those should be taken as indicators or signs of where vulnerable in a proxy contest.
Wolfenberg said his personal view is that he “pays no attention to ISS or anything they have to say,” but he said its commentary and studies will be used in a proxy battle — both for and against. So, if a company scores high in one category, it will be touted by the issuer; but if it scores low in another, a potential foe will point to the low score and suggest change needs to occur.
Dealing with customers who are insolvent or heading toward insolvency is another challenge the sector faces.
In his practice, Kibben Jackson, of Faskens, said that, at least twice a week, he gets a call from one of the firm’s partners asking him to jump on a call with a board that is experiencing cash flow or financing difficulty and worried about insolvency and potential exposure.
“I think a lot of the time it comes from the in-house folks who want to know what they have to worry about,” he said.
He said there are two different types of looming insolvency — one is where there is a foreseeable insolvency because a series of bonds are coming due.
“The company may be chugging along and making money, paying its suppliers, but in the back of their minds there is a looming insolvency event because they have to pay $300 million in bonds and there is no way they are going to do it,” he said.
The other scenario is that a customer has stopped paying, or is going from paying in 30 days to 90 or 120 days.
“How do you know your customer is in trouble? They start doing that kind of thing,” he said.
So what is the next step? Crank up the discussion early about what your actions will be — look at terminating the contract or stopping supply on credit.
Magnan asked how to balance being loyal to customers with the need to protect the business.
“I view moving to COD as a terminal event in the relationship,” he said. “If you make the wrong call, there’s no going back from that. How do you balance those competing priorities?”
Jackson said that, in an economy like this, sometimes, up to 60 or 80 per cent of customers are not meeting their payables, so if you ask for cash on delivery, that might be the death knell for that company. If you do that to 70 per cent of your customers, you don’t have much of a business left either.
So try to act before your customer is insolvent — if you see it coming, do what you can because the impact of any restructuring events affects your ability to do anything, including termination of contracts.
Also, if the supplier gets to insolvency, stop supplying on credit.
Some sources of director liability from the insolvency side also include unpaid source deductions not paid to the Canada Revenue Agency, unfunded pension obligations, and unpaid wages for employees.
“Invariably, every jurisdiction has some exposure for directors for wages,” he said. “When someone calls and asks what they need to worry about, I say CRA — unremitted GST— and pay employees their wages, hopefully severance, but at least wages and vacation.”