Kingsdale Shareholder Services (Kingsdale) recently released its annual Proxy Season Review. As in previous years, the report discusses trends observed in 2016 and offers predictions of what we might see looking forward. The report also outlines strategic recommendations for Canadian companies.
Trends from 2016
Contested Activity “Back to Earth”: After a record setting year in 2015, Kingsdale reports that activist activity has returned to its pre-2015 levels, which had been fairly consistent for about five years. Kingsdale attributes this reduction to strong share performance, increased adoption of defence tactics by vulnerable companies, and political and economic uncertainty, which led to “market prudence and skepticism.” Where activist situations did occur, 2016 was once again a strong year for management. In the bigger picture, this is the third consecutive year that activist success has trended downward, which may signal that companies are becoming better prepared for activist activity.
Rise of Minority Slates: Where board seats are sought, an increasing number of activists are focusing on minority slates (or “short slates”), seeking representation as opposed to control. Interestingly, the use of minority slates has become increasingly correlated to activist wins: in 2016, activists using minority slates won an impressive 80% of battles where board seats were sought, compared to a mere 11% for activists using a majority slate. The continued trend toward minority slates may be attributable to a few factors, including the increased likelihood of an activist victory. When activists seek a small representation on the Board rather than a full takeover, management may be willing to either expand the board or identify a few expendable “sacrificial lambs” among the incumbents.
The “Insider Activist”: Former CEOs, directors, and founders are increasingly targeting companies that they once led. This activity brings with it not only personal “grudge matches”, but also unique and sometimes unanticipated risks. Due to the depth of knowledge that former insiders may possess, including knowledge of non-public information, these activists may be able to refute arguments deployed by the board in its defense more easily than an outside activist. Further, insider activists may be able to exploit internal incongruities among management in an attempt to divide a board.
Looking Forward
The Rise of the Reluctavist: A “reluctavist” is a party who “begrudgingly adopts activist tactics when all other avenues are exhausted.” The report indicates that we may begin to see traditionally passive institutional investors adopting activist-like tactics, instead of simply “voting with their feet” by selling their position.
The Arrival of Short-Seller Activists: An emerging trend that combines short-selling with an activist approach may present unique challenges to Canadian companies. Short-selling activists endeavour to make money by shining a spotlight on the alleged overvaluation of a company. The unique challenge for Canadian companies arises from a number of factors, including an asymmetrical market that reacts disproportionately to bad news and a lack of visibility regarding short positions in a company. Kingsdale suggests that the most effective responses to short-selling activists tread a fine line between engaging with the activist, but not appearing overly defensive.
Recommendations
The report offers three key recommendations for Canadian companies looking forward:
- Define the Activists from the “Ankle-biters”:The current activism climate features many “pretenders”; companies should become adept at quickly determining the credibility of any activist.
- Pay Attention to Retail Investors: Strong ongoing turnout of retail holders – the “moms and pops” – can be the difference in a contested situation.
- Engage with Shareholders at the Board Level: Regularly engaging with shareholders can earn early support in a proxy contest and help the board understand shareholders’ expectations.
The author would like to thank Geoff Mens, articling student, for his assistance in preparing this legal update.
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