Shareholder activism is the ‘new normal,’ Kingsdale report says

VANCOUVER — There’s been a rising tide of proxy contest activity in Canadian markets since 2008, and advisory firm Kingsdale Shareholder Services is cautioning companies that higher shareholder activism represents a “new normal” that requires greater diligence in engaging investors.

In its annual publication, 2015 Proxy season review: Creating certainty in uncertain times, Kingsdale notes that halfway through the year there were almost as many proxy contests as “all of 2014 combined.” The mining and energy sectors have been particularly prone to shareholder activism due to weak commodity prices, and are most likely to be targeted in proxy situations.

Cases in the resource space have included: Stan Bharti’s Aberdeen International (TSX: AAB) and its battle with Texas-based Meson Capital and U.K. based Nightscape Capital; Clifton Star Resources’ (TSXV: CFO; US-OTC: CFMSF) proxy battle with ex-president Harry Miller; Resource Capital Fund’s attempt to nominate directors to IC Potash’s (TSX: ICP; US-OTC: ICPTF) board; and Karnalyte Resources’ (TSX: KRN; US-OTC: KRLTF) dispute with a “concerned shareholder” group headed by ex-CEO Robin Phinney.

More recently, shareholders of New Millennium Iron (TSX: NML) have accused the company of “destroying value,” and seek to replace the board of directors; while explorer Fission Uranium (TSX: FCU) faces a proxy challenge from retail investors at its annual general meeting in December (see Page 3).

“When times are good, shareholders are more likely to stomach suboptimal decisions by management, since strong market returns tend to mask a lot of problems. Maybe there’s a bit of a willingness to turn a blind eye to some of the corporate governance concerns,” Kingsdale’s vice-president of communications Ian Robertson said during an interview.

“But when markets turn and share prices are exposed, shareholders take a longer look at some of the details, in terms of how management is coping with tough financial realities to get a company back on track. Part of the situation is that governance issues often become symbolic in terms of whether or not a board is on the same side as shareholders,” he added.

And so-called big companies are no longer necessarily insulated from shareholder activism. One of the year’s prominent cases involved a dispute over management compensation and accountability.

In late April, Barrick Gold (TSX: ABX; NYSE: ABX) chairman John Thornton pledged to change the miner’s compensation plan, after 75% of shareholders voted against the pay structure. Reportedly Barrick was under pressure by Canadian pension funds and other major investors.

Kingsdale notes that shareholders have appeared to “reach their breaking point” in terms of compensation-related concerns. The report explains that “say-on-pay” initiatives are rarely one-year affairs, and are often symptoms of underlying concerns investors have over executive pay levels and shareholder returns.

“Another point in terms of trends is that it’s now not just so-called ‘activist shareholders’ that are looking at companies through a critical lens. A lot of big investment and pension funds are open to working more closely with activists, or they allocate a portion of capital to those types of actions,” Roberston added.

“It’s not just about re-engineering balance sheets. It’s about making improvements on business performance in a number of areas. We’ve seen an emergence of a class of activists we call ‘constructivists,’ who want to sit down with the board of directors and look at more collaborative, corporate change,” he continued.

Another area where shareholders can play a major role — and activism can evolve — involves mergers and acquisitions. For example, Fission ran into retail investor issues after a failed merger with Lukas Lundin’s Denison Mines (TSX: DML; NYSE-MKT: DNN). Corporate governance measures also contributed to the marathon negotiation that resulted in Hudbay Minerals’ (TSX: HBM; NYSE: HBM) $516-million acquisition of Augusta Resource.

Kingsdale recommends that companies familiarize themselves with the takeover rules proposed by the Canadian Securities Administrators, which it says “significantly tip the balance in favour of the target board.” The new rules would extend bidding from 35 days to 120 days, and implement a 50% minimum tender requirement. The regulations aim to ensure that most shareholders support a takeover, and would prevent a bidder from accumulating a larger position to increase leverage.

“The 120-day rule is target-friendly in terms of takeovers. It allows more time to go out and procure a ‘white knight,’ as we call them, and cost of transaction for the bidder clearly goes up, compared to the previous regime,” Kingsdale executive vice-president Hooman Tabesh said.

“The good thing is that it sort of does away with the ‘poison pill,’ where every time you have a take-over, the first thing a target does is put together a shareholder rights plan to buy time and find another transaction,” he added.

The topic is particularly apropos given the recent $4.3-billion hostile takeover attempt of Canadian Oil Sands (TSX: COS) by Suncor Energy (TSX: SU; NYSE: SU). Canadian Oil adopted a shareholder rights plan, and the Alberta Securities Commission ruled to allow shareholders 120 days to consider the bid.

It appears the trend is moving toward a greater shareholder demand for transparency and accountability from executive teams in the resource space. Kingsdale notes that institutional investors have become increasingly clear that they expect access to independent directors and a clear process for regular interaction.

“We think corporate bodies and company boards need to be ready to respond to the fact that proxy battles will simply be more common all year round,” Robertson said. “There are a lot of activist interactions that take place behind the scenes and never really make it onto the public stage. The big thing we’re communicating is that directors of companies must get out and engage shareholders. A lot of proposals do have merit, and companies need to keep an open mind.”