Patricia Olasker heads the shareholder activism practice at Davies, advising both boards and activists. As a result of her leadership, Davies Ward Phillips and Vineberg has been involved in almost every high-profile activist campaign in Canada. Steven Harris is a partner in the shareholder activism practice, and regularly advises activist shareholders, boards and issuers on all matters relating to activist campaigns.
We were able to sit down with both Olasker and Harris as they shared with us their insight on the proxy season thus far from the activity occurring in Canada.
Christopher P. Skroupa: What are the top issues shareholder activists have taken to board and management this season?
Patricia Olasker and Steven Harris: The headline-generating activism in Canada this year has focused primarily on economic activism issues such as capital allocation and operational improvements. Also, activists have been mounting multiple short slate campaigns this proxy season directed at underperforming targets such as FrontFour’s campaign against Obsidian Energy and Cation Capital’s campaign against Crescent Point Energy. Campaigns aimed to drive value maximization through transformative events such as Blue Harbor’s pressure on the board of Open Text, too.
At the same time, an interesting trend, mostly behind the scenes, shows “active-passive” investors and “responsible” investors increasingly pressuring issuers on environmental, social and governance (ESG) issues. Among the ESG issues, most prominent is the continuing push to increase gender diversity in the boardroom and implementation of related policies to foster gender diversity. The extractive industries continue to see concerns being advanced on environmental practices and disclosure. We are also seeing growth on the social side of the equation similar to the United States and Europe, for example, with the minimum wage public policy debate being echoed in shareholders advancing proposals intended to pressure issuers into adopting “living wage” policies and practices.
Activism is also proving to be a valuable tool in M&A. 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 are attracted to the incentives offered in a private equity-led management buyout. These situations create a natural space for activist investors 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 stand-alone long-term strategy.
Related to both M&A and governance issues, in September 2017, Paulson & Co. went public with sharp criticism of what it considered to be serial value destruction through M&A activity in the gold sector since 2010 that led gold companies to collectively write off roughly U.S. $85 billion while at the same time significantly increasing CEO compensation. Paulson called for the formation of a Shareholder’s Gold Council composed of a broad base of significant gold shareholders to give a greater voice to institutional investors on matters including board appointments, compensation and M&A activity. While we have not publicly seen significant traction in the formation of the Shareholder’s Gold Council, the issues raised by Paulson are no doubt weighing heavily on the minds of management and directors of gold companies considering M&A activity.
Skroupa: How would you describe the issues and the resolutions?
Olasker and Harris: Substantially all issues advanced by shareholder activists, whether the activists are classic economic activists or active-passive investors, are at their core economic in nature, with the distinction being drawn along the timeline for returns. The more pressing economic activism focuses on nearer-term gain through tangible action by the issuer, whether it be a divestiture, management change or operational change. The issues being advanced through ESG have a much longer time horizon and are expected to create shareholder value through diversity in the boardroom, improved risk analysis, better understanding of and response to social forces, and preservation of social licence to operate.
We are seeing boards and management being increasingly willing to thoughtfully consider ESG issues as those issues become mainstream. They are willing to engage in dialogue outside the spotlight, understanding that some ESG issues can represent a new perspective that leads to enhancement of shareholder value over the long term. Many boards we advise are preemptively donning the hat of the activist to tackle low hanging fruit and limit the grounds for future activist engagement. The more bleeding edge issues, however, generally remain mired in corporate opposition. The first instinct of the embattled board frequently continues to be to fight, although the numbers show us that settlement remains the most common outcome in Canada, with activist investors scoring at least partial or clear victories in more than two-thirds of contests – depending on the metric for assessing results.
On the M&A front, we have seen instances in which 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, last year, Oaktree Capital Management, a long-time shareholder of Tembec Inc., used the activist toolkit to force an improved offer from Rayonier Advanced Materials. There are also a number of instances in which 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 and together SunOpta and Engaged achieved a better result for shareholders than either could have done alone. Activists have also 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 was supported by INNOVA’s 41% shareholder, 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 they succeeded.
Skroupa: Do shareholder activists have a larger appetite for proxy contests than last year?
Olasker and Harris: While the number of proxy contests per year has not risen over the past five years, the view of our activist clients remains “not necessarily a proxy contest, but a proxy contest if necessary.” Both companies and activists wisely seek to avoid the cost, time demands, brand damage, reputational harm, distraction and uncertainty that a proxy contest necessarily entails. That said, given the growing unease among directors over shareholder opposition to settlements with activists, and the increasing desire to seek shareholder input on key issues, we may see more issues being resolved at the ballot box. Perhaps the “gentle persons” proxy contest that we saw at CSX where the board and activist Mantle Ridge differed on the issue of a payment to the CEO and agreed to put the issue to a vote of all shareholders at a meeting in respect of which neither would solicit proxies will become more common.
Skroupa: Is there a reason for this change in approach?
Olasker and Harris: For the smaller companies that populate the Canadian corporate landscape, our U.S. activist clients often find that the investment itself is not worth the high cost of a proxy contest. If their efforts to achieve management or board change through negotiations fail, they will ultimately exit the stock.
Or they may resort to a withhold campaign. We are seeing an increase in appetite by both activists and traditional long-only investors to either threaten or engage in withhold campaigns – that is, public campaigns to encourage shareholders to withhold their votes on the election of one or more director nominees of an issuer.
There are a number of reasons why a withhold campaign can be an attractive course of action. A withhold campaign is a flexible tool in the hands of an investor who wishes to target a specific issue without necessarily causing broad disruption in the boardroom. For example, an investor could mount a withhold campaign against the chair of a nominating committee of a company that has demonstrated intransigence on the issue of gender diversity; or an investor could target the chair of the compensation committee to express displeasure over compensation decisions. A withhold campaign can be tailored to target specific individual directors with a concise narrative that can be difficult to rebut, and it does not require the investor to advance an alternative nominee, thus depriving the issuer of a target at which to aim.
A withhold campaign can be mounted at significantly less expense than a full-fledged proxy contest, thus representing a potentially cost-effective means of expressing shareholder discontent. A withhold campaign also does not need to be successful to count as a win. The fact that the campaign was mounted and saw some take-up, without necessarily unseating a director, can stimulate the desired engagement by the board on the investor’s issue.
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