In the wake of Dole Food Co.’s $2.4 billion management buyout, the question of whether the exercise of shareholder appraisal rights is an effective tool in the Canadian shareholder activism scene emerges.
In late 2013, management of Dole Foods offered to purchase the remaining 60% of shares not already owned by CEO and founder, David Murdock at what the market and analysts deemed an “underwhelming” offer. The buyout was accepted by a majority of the minority shareholders (barely!) however, certain shareholders (hedge funds following the lead of Carl Icahn), reserved and exercised their appraisal rights during the process. Ultimately, about 25% of Dole’s shareholders successfully exercised their appraisal rights. For a more comprehensive analysis on the use of appraisal rights in Dole Foods, please see this recent New York Times article.
Appraisal rights similarly exist for many Canadian corporations pursuant to such corporation’s governing corporate statute. For instance, under the Canadian Business Corporations Act (the CBCA), Section 190(4) gives a court broad discretion to make “…any interim or final order it thinks fit…” in respect of, for instance, a shareholder’s right to dissent to a proposed take-over bid. Through the exercise of dissent rights, a shareholder can challenge a bidder’s offer for his or her shares and request the shareholder instead be paid the “fair value”. While the CBCA (and equivalent corporate statutes) sets out how “fair value” is determined, Canadian courts have also weighed in on how this may be determined on a variety of factors including market price, net asset value, earning capacity, or some combination of the three (see Re Domglas Inc).
So are appraisal rights an effective shareholder activism tool? Probably not.
For one, unlike other shareholder actions and remedies, the corporation will not be on the hook for the shareholder’s costs if the corporation “loses” this battle, so the legal expenses incurred by the shareholder in bringing the appraisal action will be borne by the shareholder. For a retail (i.e. not institutional or hedge fund) shareholder, the cost of bringing an appraisal action may far exceed any gain to be realized on a reassessment of fair value by a Court. (Side note: on a recent arrangement under which dissent rights were granted to shareholders, we received one dissent from a shareholder holding 17 shares of the Company. The “fair value” of these shares is under $5.00. The cost of bringing this action will (slightly) trump this shareholder’s “victory”).
Secondly, dissent rights may only be exercised by registered shareholders under the CBCA (and equivalent corporate statutes). Many shareholders in Canada hold their shares “beneficially”. While this is an administrative hurdle, it is one which must be addressed and prior to the passing of any record or cut-off date.
Third, if the goal is to effect a change (read: activism), exercising appraisal rights does not logically appear to be the best route to get there – the shareholder is, after all, cashing out. If the shareholder believes that there is truly unlocked value, exiting at a crucial time in the corporation’s existence, and attempting to take a pound of flesh on the way out the door, would be counteractive to this goal.
Accordingly, while appraisal rights are a valuable tool in the shareholder’s arsenal, their use likely falls more squarely in the “maximizing a shareholder’s return on investment” bucket. Investment tool – yes; activism tool – not quite yet (but give us time).