In theory, shareholders are always able to vote on the management of a company with their feet — by selling their shares and heading for the exits. But what happens if the size of your ownership stake is so large that it becomes impractical to sell your shares at a reasonable price due to the lack of liquidity in the market?
While quiet diplomacy to negotiate the departure of deadwood at the board level sometimes works, with increasing frequency many institutional investors are threatening (and sometimes implementing) more aggressive tactics.
The most aggressive approaches to board regime change are proxy battles and voting ambushes. These techniques are used when a corporation’s stockholders oppose some aspect of corporate governance and use their own votes (and try to persuade other shareholders to use their votes) to install new management. The past five years have seen a significant increase in the number of proxy battles in Canada. Both large companies, such as Lions Gate Entertainment Corp., and smaller resources-based companies, such as EurOmax Resources Ltd. and Luiri Gold Ltd., have recently become proxy battlegrounds.
Large shareholders’ willingness to force a regime change is particularly telling, considering how messy and damaging such a battle can be to a company. Often the fight for control of the board can become borderline defamatory, with both sides exchanging increasingly heated accusations. The repercussions for share value, as both sides “dig up dirt” to attack their opponents, can be severe. Such was the case in the EurOmax Resources proxy fight, in which allegations of insider trading were made against the major shareholder that initiated the regime change.
Staff morale also frequently takes a hit as employees, anxious to avoid an unstable (and frequently bitter) employment environment, abandon the company in favour of other opportunities.
All of this is to say a good advisor needs to remain conscious of the warning bells when it comes to proxy battles. Key issues to look for include general shareholder dissatisfaction with the progress of the company, concerns around the entrenchment of management or the board’s selection of management, concerns around large expenditures from the company’s treasury for little or no benefit and general worries about share-price performance. It is important for investment fund managers to keep an ear to the ground to ensure they are aware of how management is doing and how they are perceived to be doing among large-scale investors in the company.
If the general perception is that management is not focused on obtaining results for the good of all shareholders, the business may be sliding down the path toward regime change. Equally important to recognize is the amount of communication flowing between the company and its shareholders.
If an investor has concluded that the time has come to replace management and the current board of a company, it is important to keep a number of factors in mind. Dissidents need to consider the votes potentially up for grabs. In any proxy contest, the number of registered shareholders becomes critical. Ensuring you have the number of votes needed to win the fight for the board — as well as the funds and time necessary to run a convincing campaign — is important.
Always keep in mind that management controls the timing of the annual general meeting process and that this can be used to their advantage. (While an AGM can’t be delayed indefinitely, it can usually be delayed for some months.)
Finally, it is critical that when push comes to shove, dissidents are ready for a fight. In these contests, litigators quickly become involved in the whole process, which often ends up in the courts. This can become very expensive very quickly.
During the actual AGM, both sides need to ensure all solicitation agents, advisors, counsel and representatives are “registered shareholders.” These advisors need only one share to immunize them from being cleared from the AGM floor for a “closed-door shareholders meeting.”
Although this pre-registration is important, it can also quickly tip off management to an impending battle. Management, sensing discontent among its shareholders, can often be alerted by a long list of newly registered shareholders each holding one share.
Regardless of which side you fall on, keep in mind that if you see a proxy fight, someone in management has let the disconnect between the company’s shareholders and management get so bad that an embarrassing, messy and litigious fight was the only way to deal with the problem. IE
Gordon Chambers and Joanna Cameron are partners at Lawson Lundell LLP in Vancouver.