We spoke with Fred R. Pletcher, a partner in the Securities and Capital Markets Group and Chair of the National Mining Group at Borden Ladner Gervais LLP. He advises public companies and underwriters in connection with a broad range of transactions and issues, including mergers and acquisitions, corporate finance, corporate governance, continuous disclosure and general commercial matters. Pletcher has considerable experience in the field of shareholder activism and also frequently advises boards of directors and special committees of public companies.
Christopher P. Skroupa: What was one of your more notable successes? Why?
Fred Pletcher: Interestingly, we acted successfully on two proxy fights in the 2017 season which came down to the wire with close votes at the shareholders’ meetings themselves. This is increasingly a rarity, as most shareholder activism campaigns tend to settle, and in those few that don’t usually one side or the other throws in the towel a few days before the meeting as the results of the vote become clear.
In both of these proxy fights, the selection of Chair for the meeting was contested before the courts. And in both fights, that determination proved to be pivotal to the outcome.
The Chair plays a crucial role in contested shareholder meetings as he or she rules on procedural matters, including which proxies are to be accepted or rejected prior to the ultimate vote. And where there is a narrow vote margin, those rulings can be decisive.
In one of these proxy contests we were successful in obtaining a court order appointing an independent Chair for the contested annual meeting of Rapier Gold Inc., at which our client, Delbrook Asset Management, sought to replace the entire board.
Courts in Canada are traditionally reluctant to appoint independent meeting Chairs. However, in this proxy fight, Rapier’s management had telegraphed that it might seek to have all of Delbrook’s proxies rejected on the basis of management’s alleged concerns with respect to disclosure in Delbrook’s proxy circular.
While a wholesale rejection of an activist’s proxies is squarely at odds with modern notions of shareholder democracy, surprisingly the practice had been upheld by the British Columbia Supreme Court in the 2013 Hastman v. St. Elias Mines Ltd. decision, where the court gave deference to a Chairman’s decision to reject proxies cast against an incumbent board on the basis of alleged misrepresentations in the dissident’s proxy circular – notwithstanding that the dissident received 90 percent of the vote at the meeting.
In the Delbrook/Rapier contest, however, the same court held that where there is evidence that an en masse rejection of the activist’s proxies may be sought it creates a reasonable apprehension that the meeting will not be properly conducted and the appointment of an independent Chair was found to be appropriate.
At the meeting, management ultimately did seek the rejection of Delbrook’s proxies based on alleged deficiencies in Delbrook’s proxy circular. However, the independent Chair carefully considered and rejected these allegations and accepted Delbrook’s proxies – which represented a majority of shares voted.
The events underscored the critical role that is played by the Chair in contested meetings.
Skroupa: From the management perspective, what were the major wins across all of Canadian corporate companies this year in response to activist campaigns?
Pletcher: The most prominent win for Canadian management in 2017 was Hudson’s Bay Co.’s (HBC) success against a determined activist campaign by Land & Buildings Investment Management LLC. Another management win that received significant media attention in Canada, even though it involved a much smaller company, was Eagle Energy Inc.’s win over an activist group led by Daniel Gundersen and Kingsway Financial Services Inc.
Skroupa: What made those wins significant?
Pletcher: While HBC did take steps to monetize some of its real estate assets, as advocated by Land & Buildings, HBC’s win turned on its $628 million private placement of convertible preferred shares to Rhone Capital, who was supportive of HBC’s management. The private placement gave Rhone Capital approximately 21.8 percent of HBC’s voting securities – potentially increasing to 30 percent, if all convertible preferred shares are held to maturity for their full eight year term.
Although Land & Buildings initially sought to challenge the private placement before the Ontario Securities Commission, Land & Buildings ultimately adjourned its application and a settlement was reached.
HBC’s successful reliance on a private placement as a defensive mechanism contrasts with another OSC ruling earlier in the year, involving a proxy fight at Eco Oro Minerals Corp. In the Eco Oro decision, the OSC overturned the Toronto Stock Exchanges’ approval of Eco Oro’s issuance of securities to a supportive party, Trexs Investments, LLC, through the early conversion of convertible notes in the middle of a proxy fight by Harrington Global Opportunities Fund.
The fundamental distinction between the two cases was that HBC obtained written consents from a majority of its shareholders to the private placement to Rhone Capital, whereas Eco Oro’s shareholders had voted against a prior proposed placement to Trexs Investments, LLC. In addition there were more compelling commercial reasons for HBC’s private placement than for the early conversion of Eco Oro’s notes.
Eagle Energy’s win gives a good indicator of where activists stand in the sizeable Canadian oil and gas market. Low commodity prices have hit Canada’s large oil & gas sector hard over the last few years. Many market observers had expected depressed share prices to generate increased shareholder activism in Canada’s oil patch.
However, Eagle Energy’s success against Mr. Gundersen and Kingsway in 2017 underscores that Canadian retail shareholders will not blindly support activism based on poor share price performance alone during a sector-wide downturn. Notwithstanding that Eagle Energy’s share price had declined 90 percent since its IPO, shareholders threw cold water on a proposed divestiture strategy from Gundersen and Kingsway. Shareholders – understandably, from our perspective – didn’t see any benefit to selling oil and gas assets during a downturn in commodity prices.
Skroupa: How will those wins shape the 2018 season?
Pletcher: I expect that Canadian management teams will be encouraged by the success of HBC to consider the use of private placements to a friendly party as a possible defensive tactic when faced by a potential activist campaign.
I also expect that Canadian oil and gas companies will be encouraged by the success of Eagle Energy to push back against generic activist proposals, notwithstanding low share prices across the industry.
Skroupa: Do you think the trends in Canada will reflect the trends in the U.S. during the 2018 season, or will Canada have its own unique issues and opportunities?
Pletcher: The Canadian landscape for shareholder activism is very different from the U.S., due to the predominance of resource-based companies, a higher proportion of mid- and small-cap issuers and a different regulatory and legal framework – which is, frankly, more conducive to activism. As a result, we foresee that many trends in Canada for 2018 will continue to be unique and distinct.
One U.S. trend, however, that we anticipate will make its way across the border is continued activist scrutiny of Canadian REITs and other entities with significant real estate holdings – indeed, we already saw evidence of this trend in Canada in 2017 at HBC and Granite REIT.
Skroupa: What do you see as the more impactful defense strategies moving forward from 2017?
Pletcher: A strong shareholder engagement program combined with a cogent and well communicated corporate strategy and at least an annual consideration by the board of strategic alternatives to drive shareholder returns remains the best defense for management teams against shareholder activism.
As the HBC contest suggests, however, private placements of voting stock to supportive shareholders can play a game-changing role in responding to activism. But as the Eco Oro decision demonstrates, such private placements are susceptible to being challenged – particularly where shareholder support for the placement cannot be demonstrated or there is not a compelling commercial need for the placement.
Other purely tactical defences are less likely to succeed. Rapier Gold’s unsuccessful efforts to reject activists’ proxies holus-bolus is an example. Another defensive strategy which failed in 2017 and is unlikely to be repeated was the formation by Liquor Stores N.A. Ltd. of a soliciting dealer group to pay brokers for votes received in support of incumbent directors in its proxy fight with PointNorth Capital. Liquor Stores’s tactic of paying for votes was widely condemned in the Canadian financial press as poor corporate governance and may have inadvertently buoyed PointNorth’s campaign among governance-focused institutions which were otherwise on the fence.
Finally, over the past few years, shareholder activists have fared very poorly in court actions alleging oppression under Canadian corporate law. Accordingly, I suspect management teams will continue to push back hard against threatened oppression actions by activist shareholders in 2018.
Check out the agenda for the upcoming Shareholder Engagement and Communication London conference here!