Commentary: Watch out for the activist shareholder!

Last year was a busy one in Canada with respect to shareholder activism. There were high-profile proxy battles, such as those at TELUS and Canadian Pacific Railway, as well as several lower profile ones in the junior mining sector. These high-stakes battles should serve as reminders to mining companies of the value of keeping informed and thinking ahead. No mining company is immune from shareholder activism, and this sector is especially vulnerable to activism in light of the challenging market conditions it faces.

How can you guard against activist shareholders? It is very prudent to be prepared early and well in advance of your annual general meeting, and to take a proactive approach when dealing with shareholders. Here are some steps that you can take to help mitigate the risk of encountering problems with shareholders at your next AGM.

Engage with your shareholders and be aware of changes to your shareholder base — It is very important for an issuer to stay connected with its shareholder base throughout the year and to continually gather information on the sentiment of shareholders. Management should be self-conscious and alert to issues, concerns or complaints raised by shareholders. You should regularly check the “bullboards” to get a sense of what investors are saying about your company. Always be on the lookout for warning signs, such as a request for a copy of your company’s shareholder list or a request for board representation, or other evidence of shareholder discontent with the performance of the company or its management. It is also important to be alert to any conflict or dissent among your board members.

Meet and engage with shareholders who have concerns, listen to them and have an open discussion. Try to resolve their concerns if you can; if you choose to ignore them, you should anticipate how this might be negatively portrayed in a dissident proxy circular. If concerns are raised about the performance of an individual board member, management might consider not putting him or her forward as a nominee at the next AGM, especially if the issuer has adopted a majority voting policy.

In addition, companies looking to guard against shareholder activism should look out for changes to the shareholder base. Watch for shareholders that have crossed the 10% threshold and published an early warning news release and filed early warning and insider reports. If a shareholder has filed an early warning report, don’t make the mistake of taking a wait-and-see approach with that shareholder. Rather, management should find out as much as possible about the new shareholder, including whether this shareholder has a history of activism. Once you’ve done this research, you should consider taking a proactive and pre-emptive approach and reaching out to and engaging with the shareholder.

An issuer that does not routinely gather such information and take it into account in planning its AGM (and as part of its governance and investor relations generally) should make a concerted effort to do so well in advance of its meeting. Information on shareholder sentiment and activities is relevant to virtually all aspects of meeting preparation, including the timing of the meeting and record date, the location of the meeting, the resolutions proposed to be tabled at the meeting, and the disclosure in the proxy circular

Know who your defence team will be and develop a defensive strategy — Be prepared well in advance of your shareholder meeting and avoid being complacent. It’s a recommended practice to develop a detailed defence strategy in advance, and have it ready to implement. Your strategy should include things like identifying who will manage the process and who your defence team will be (along with their contact information) and having a communications plan ready.

A vital member of this team will be a proxy solicitor. You should engage the proxy solicitor as early as possible, and well before scheduling your next shareholders’ meeting if you suspect that dissidents may come out of the woodwork, or if you are to put to a shareholder vote anything that could be controversial.

As part of taking a proactive defensive approach, consider engaging in an internal review of corporate governance, compensation practices and corporate strategy so that you can pre-empt potential concerns of would-be activists and show that the board is being proactive and looking at value-maximizing opportunities for shareholders. Shareholder activists will often raise issues such as the company’s long-term strategic direction, especially where the company is underperforming compared to its peers.

Adopt an advance notice requirement — Canadian reporting issuers should consider adopting advance notice requirements that oblige shareholders to give advance notice of their intention to nominate directors for election at an upcoming shareholders’ meeting (which thereby prevents an ambush by a dissident who nominates his or her own nominees from the floor at the meeting). An issuer may adopt such advance notice requirements by way of a new by-law or an amendment to its constating documents (or by way of a board policy). Advance notice requirements are common in the United States, and both Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. will generally support the adoption of an advance notice requirement pursuant to which shareholders are required to notify the issuer not more than 65 days and not less than 30 days before the meeting if they intend to nominate new directors to the board.

Be familiar with ISS and Glass Lewis proxy voting guidelines — In advance of your shareholder meeting, pay close attention to the published proxy voting guidelines of proxy advisory firms ISS and Glass Lewis if you have institutional shareholders. Be aware how such firms will recommend voting of shares, especially if you expect a challenge from dissidents, or if you are seeking shareholder approval to such things as the adoption of a shareholder rights plan or an amendment to stock options or stock option plans. Also be aware of the principles that ISS and Glass Lewis apply when determining votes on director nominees, especially in light of the appearance of majority voting policies in Canada (which typically require a director who receives a majority of “withhold” votes to tender his or her resignation from the board. The TSX has adopted new policy changes regarding majority voting policies, including requiring its listed issuers to disclose in their securityholder meeting materials whether they have adopted a majority voting policy for the election of directors for uncontested meetings).

In summary, remember that proactivity and preparation are very important. Remain in regular contact with your key shareholders, listen to their concerns and be prepared to address them. Be ready with a defensive plan in place in case you face a proxy fight from dissident shareholders. Consider adopting an advance notice requirement to avoid being ambushed at your next AGM.

— Brett Kagetsu is a partner in the Vancouver office of law firm Gowlings and vice-chair of the Corporate Finance and M&A National Practice Group. He advises mining companies in respect of corporate finance, securities and corporate governance matters, as well as in connection with mergers and acquisitions. For more information visit http://www.gowlings.com and email brett.kagetsu@gowlings.com. This article was prepared with contributions from Kathleen M. Ritchie and David Taniguchi.