Zachary George is a co-founder and portfolio manager of FrontFour Capital, a value-oriented, event-driven hedge fund manager. George has spent more than a decade evaluating catalyst based investment opportunities across the capital structure of small and mid-cap North American companies and has successfully invested in both passive and activist opportunities. George has worked in a management capacity and with numerous corporate boards to turnaround operations, effect corporate action, and implement governance policies in order to maximize shareholder value.
Christopher P. Skroupa: Are there any differences between how proxy fights are held in the U.S. versus Canada? If so, what are the differences?
Zachary George: The largest differences between the two countries are based on securities laws, not necessarily the mechanics of how a proxy fight is held. There are two main differences which are worth noting. First, activist investors in Canada benefit from the general ability to requisition a special meeting of shareholders if they own a 5 percent stake resulting in flexible timing for the initiation of corporate change. In addition, Canadian disclosure requirements are such that an activist investor does not necessarily have to disclose its ownership position until it reaches 10 percent, whereas in the U.S. the threshold is 5 percent.
Skroupa: In the context of replacing a board member, how often does a proxy fight escalate beyond a pre-replacement settlement in Canada?
George: Our team ran approximately 20 campaigns over the last decade. Approximately half of our campaigns resulted in settlements averting a distracting and expensive proxy contest that runs right to the shareholder meeting date. In fact, we are currently engaged in private dialogue with multiple boards in regards to their go-forward composition, and the potential replacement of board members.
Skroupa: Has the U.S. market affected proxy fights in Canada, and if so, how?
George: The U.S. market has affected proxy fights in Canada in a number of direct and indirect ways. From an investor standpoint, the proliferation of activist investors of all stripes in the U.S. has naturally resulted in this group of investors looking north of the border for differentiated investment opportunities. We work with a number of Canadian legal and financial advisors who frequently comment that there are only a handful of domestic Canadian activists that sustained any track record beyond a few campaigns or special situations. Much of their business on this front is driven by U.S. based funds and investment groups.
The less obvious, but no less material, impact the U.S. market has on proxy fights in Canada relates to the growth of low cost active and passive investment vehicles. U.S. based mutual funds, exchange-traded funds and other passive products have increasingly become significant owners of Canadian equities. With a few exceptions, these groups tend to vote in line with ISS and Glass Lewis recommendations. The importance of the recommendations of shareholder advisory firms grows significantly as the collective ownership of Canadian companies by this group of investors increases.
This dynamic has reduced the occurrence of majority change on corporate boards. Furthermore, the dynamic placed increased pressure on activist shareholders to establish a case for change and clearly articulate compelling corporate strategies and governance improvements, which will create sustainable value.
Skroupa: Looking ahead as 2018 unfolds, how do you perceive shareholder engagements changing?
George: While I don’t foresee radical differences coming to proxy fights in 2018, I do expect a continued evolution in the sophistication of both activist campaigns and corporate defense strategies. The best defense will continue to be good performance. We’re expecting increased shareholder engagement and self-awareness among boards that are eager to adopt best practices from a governance perspective. In 2018, we should also continue to see an increase in diversity on boards. Qualified women will play a huge role in this change going forward and are a major focus for activist investors and nominating committees alike.
Zachary George will be speaking in a panel entitled: How to Engage with an Activist: Keeping a Proxy Fight from Evolving or Devolving in London, England on February 6 at the Shareholder Engagement & Communication conference.