Patricia Olasker heads the shareholder activism practice at Davies Ward Phillips & Vineberg, advising both boards and activists. As a result of her leadership, Davies has been involved in almost every high-profile activist campaign in Canada over the past six years, including representing Pershing Square in respect of Canadian Pacific and Valeant/Allergan, Oaktree in respect of Rayonier/Tembec, MHR Fund Management in respect of Lions Gate, JANA Partners in respect of Agrium, SunOpta, Invest REIT, Telus, Tim Hortons (on behalf of Scout Capital), TransCanada Corporation and Sherritt International.
Olasker is the former chair of the Securities Advisory Committee of the Ontario Securities Commission and is also an adjunct professor of law at Osgoode Hall Law School where she teaches advanced M&A.
Christopher Skroupa: Thank you for joining us, Patricia. How has activism in Canada evolved in recent years?
Patricia Olasker: Much has changed in shareholder activism over the past several years: from noisy public fights to quiet engagements; from knee-jerk opposition to shareholder engagement to a deliberate professional approach to shareholder outreach by issuers; and the growing willingness of institutional investors to support thoughtful activists or, indeed, to employ activist techniques themselves. But one of the most interesting developments we have seen is in the area of M&A related activism.
In the early days of activism, we used to refer to activism as the “New M&A.” By that we meant that, like M&A, shareholder activism was a tool to move assets from bad managers to better managers and thereby maximize value. The principal goal was board and management change.
Since then we have seen a new phenomenon: a convergence of M&A and shareholder activism where the activist is a central player in the M&A drama, as instigator, collaborator, lead protagonist or opponent.
Skroupa: Can you give us some examples of this?
Olasker: In takeover scenarios, we have seen instances where activists or engaged shareholders have stepped between the board of the target and the acquirer to negotiate a better deal for the shareholders. For example, this summer, Oaktree Capital Management, a long-time shareholder of Tembec Inc., used the activist toolkit to force an improved offer from Rayonier Advanced Materials. After an intense ten-day proxy campaign completed just days before the shareholder vote, over 50% of shareholders, together with sell-side analysts, ISS and Glass Lewis, came to support Oaktree’s view that the transaction was underpriced. This resulted in a re-opening of price discussions and a higher offer.
We have also witnessed situations where the activist has pushed a reluctant or stubborn board to engage with a hostile bidder. For example, when Canexus Corporation spurned a bid by Chemtrade Logistics, Stirling Funds criticized the move, requisitioned a shareholders’ meeting and proposed a slate to replace the board. Canexus engaged with Stirling and came around to negotiate a friendly deal with Chemtrade which received Stirling’s support.
Skroupa: Should boards and management feel threatened by this?
Olasker: Not necessarily. There are a number of instances where the activist has worked alongside the board to add heft and get a deal done on terms favourable to the company. For example, when SunOpta was negotiating a strategic investment with Oaktree, Engaged Capital was agitating from the sidelines. SunOpta’s response was to invite Engaged Capital into the tent under an NDA, which gave Engaged a seat at the bargaining table. Together SunOpta and Engaged achieved a better result for shareholders than either could have done alone. After the deal closed, Engaged Capital joined the board.
Conversely, activists have helped stiffen a board’s resolve to reject an unsolicited bid. When INNOVA Gaming Group sought to shake off Pollard Banknote’s unsolicited bid – which had the support of INNOVA’s 41% shareholder, Amaya – Orange Capital Ventures and MM Asset Management (with collectively 21% of the stock) each independently released public statements intended to fortify the board’s determination to hold out for the right price. And succeeded.
These partnerships between boards and activists can be powerful. But as we saw with Tembec, not all boards see the opportunity or are prepared to seize it.
Skroupa: Are activists exclusively reacting to others’ M&A proposals, or are they initiating their own as well? You mentioned activists as instigators.
Olasker: Where an activist is frustrated by a company’s persistent under-performance and lacks confidence in management’s ability to turn it around, or believes that the company’s problems are so severe that they can only be fixed outside the public eye, they may urge the board to conduct a strategic review process with a view to taking the company private. M&G Investment Management has pushed this as a solution for Gibson Energy and Jonathan Litt of Land & Buildings Investment Management is urging Hudson’s Bay to consider going private.
In other cases, instead of a sale or merger, the activist might promote a refocusing and simplification of the business through the sale of a business line. For example, JANA Partners initially encouraged Agrium Inc. to separate its stable retail distribution business from a volatile commodity-linked wholesale business.
But activists have also used M&A to positively advance a specific investment thesis. For example, in what may be the highest profile example of “activist as instigator” in the M&A context, Pershing Square acted as a co-acquirer with Valeant in the acquisition of Allergan while agitating as a shareholder of Allergan for the sale of the company.
In a similar vein, Elliott Management acquired interests in both Mitel Networks and Polycom, and then played matchmaker, encouraging them to merge with one another in order to capitalize on an industry trend of consolidation. Elliott signed an NDA and even offered financial assistance to support the deal. While the combination was not ultimately successful, Elliott’s move launched Polycom into play and it later supported a premium sale to a sponsor.
Skroupa: Should we expect to see activists continuing to be central players in M&A activity?
Olasker: M&A is an area where management is most predictably conflicted, either because they have a desire to preserve their management positions or because they are incented to approve a sale by virtue of change of control payments or option payouts. Or because management may be tired of trying to fix things; or they are attracted to the incentives offered in a private equity led management buyout.
This creates a natural space for the activist shareholder to engage on behalf of the disaggregated minority to bring an owner’s mentality to the process, exhorting the board not to sell too quickly or too cheaply, or to reflect on whether the sale of the company will deliver more value to shareholders than the board’s standalone long-term strategy.
It is also an area where a target board, knowing it has the support of a significant engaged shareholder, can take a tougher stand in negotiations with an acquirer. The shareholder can also be very effective at engaging in a second round of negotiations with an acquirer after the board has given its best shot.
So, yes, in my view, this phenomenon will continue, and some of the most interesting deals will occur at the intersection of activism and M&A.