Kingsdale Advisors has released its annual Proxy Season Review for 2018. The Review examines trends observed in 2018, predicts issues on the horizon, and provides advice to both issuers and activists in the marketplace.
In what follows, we pick out just a few of the important trends that emerge from Kingsdale’s analysis. The complete report can be viewed here.
Public activist activity remains healthy
Kingsdale counts 29 public proxy contests for the year to date. Though not reaching the high-water mark set in 2015 (55), the 29 public fights so far this year are up by 38%, as compared to the same juncture in 2017 (21).
While public agitation may be less prevalent, behind-the-scenes activity remains as robust as ever. These facts are likely related. Kingsdale estimates that just one third of proxy fights ever become public. Yet it is not clear that this trend toward settlement will continue. Issuers may be increasingly alert to activist campaigns not seriously mounted. Of 50 shareholder proposals submitted so far this year, just one passed (with the rest either failing a shareholder vote, or being withdrawn before such vote). If issuers become less willing to entertain settlement at the first approach of an activist, it is likely that more activist activity will either become public or not occur at all.
Activists are winning less
So far in 2018, activists in Canada have won 50% of proxy contests, compared to a 63% success rate in 2017. This is in marked contrast to the US activist win rate of 72%. It is clear that public companies are becoming increasingly well-defended, and small companies are taking additional pro-active steps to defend themselves.
The relative success of management and activists tends to move in cycles as each side adjusts its tactics for the next proxy season. Kingsdale notes that some of the discrepancy between Canada and the US may be explained by the fact that US activists tend to be better capitalized, and tend to have less power to agitate under US corporate laws (effectively raising the threshold of seriousness for campaigns to go public).
Materials and energy sectors remain top battlegrounds; REITs, and cannabis companies may be next
Given the predominance of energy and resources in the Canadian economy, it is not surprising that these sectors typically account for about half of Canadian proxy fights. Of 94 fights since 2016, over 55% were contained to these two sectors. To date, 2018 has been no different, with 38% of proxy contests in the materials sector and 17% in the energy sector. However, activist success rates in the energy sector have declined significantly from 50% in 2017 to 0% in 2018, and in the materials sector from 77% to 40%.
Kingsdale points to REITs and cannabis companies as potentially ripe targets for activist activity. With cannabis companies in their infancy, volatility, undeveloped corporate governance best practices, and changing shareholder bases may lead to increased activist scrutiny. Similarly, REITs may be vulnerable to activist overtures as a function of their unique statutory regime, management structure and flow-through characteristics.
Instances of activists seeking majority slates continue to trend upward
In 2015 56% of activist campaigns sought to replace a majority of directors. That number has trended up every year since 2015, reaching 79% in 2018 to date. Yet in every year since 2014, activists have enjoyed more success when seeking a minority slate. So far in 2018, minority campaigns won 75% of the time. Majority campaigns won just 33% of the time.
These numbers make clear that activists should carefully consider what they truly need in order to achieve their goals. A minority slate willing to work patiently and constructively with incumbents to increase performance for all shareholders can often be just as effective as majority control—and in any event, is more likely to be the basis for a successful campaign.