Corporate Canada has been rattled by proxy fights started by confident investors. A good plan can put your company in a better position to fight back.

Photo of Paul Beauregard, Chief Legal Officer of MTS Allstream, by Robert Tinker

Corporate counsel with Canadas publicly traded companies can be forgiven if theyre feeling somewhat beleaguered. The nature of their jobs has changed dramatically over the past decade as theyve become more active participants in their corporations daily business activities. And now, in-house lawyers and their firms face unprecedented challenges from activist shareholders.

Once rare in Canada, headline-grabbing shareholder activism and proxy fights are increasingly front-page news. Consider Bill Ackmans much publicized and successful campaign against Calgary-based Canadian Pacific Railway Ltd.s (CPs) board of directors and management through his U.S. hedge fund firm Pershing Square Capital Management LP. CEO Fred Green, chairman John Cleghorn and four other CP directors resigned from their posts just before the annual general meeting in May, then shareholders voted overwhelmingly to support Ackmans seven nominees for the board. In June, Vancouver-based biotechnology firm QLT Inc. saw a slate of seven directors nominated by a dissident shareholder elected to its board. Meanwhile, BlackBerry maker Research in Motion Ltd. grain handler Viterra Inc. and recently, telecommunications firm Telus Corp. have faced significant public investor agitation.

The sheer volume of activity signals that corporate counsel have to be ready to deal with a proxy fight before it even presents itself. Says Walied Soliman, a partner with Norton Rose in Toronto: I have one single piece of advice, and that is: Be prepared. Dont be the general counsel who picks up the phone after the activist shareholder action has started because the shareholders will have been preparing for months.

A recent report released by Toronto-based Kingsdale Shareholder Services Inc. shows there were more than 40 proxy fights in 2009 compared with about five in 2003. That number has since stabilized in the 20-25 range in 2010 and 2011.

The financial crisis, which decimated markets and the value of shareholders holdings, is partly to blame for the dramatic increase in shareholder activism, says Kingsdales CEO, Wesley Hall: Since 2007-08, the drop in the markets has been dramatic and a lot of people have been hurt financially as a result. There were those who saw that as a huge opportunity and they went out and started to shake things up. Once folks who were looking on saw that they were successful, they then said, You know what? Maybe I should give it a shot too.

Adds Brad Allen, senior vice-president with shareholder communications firm Laurel Hill Advisory Group in Toronto: Theres always been a certain level of proxy fights here in Canada, but its one that has been primarily the domain of small- and mid-cap firms. What were having now, though, is an explosion of high-profile mega-cap companies [facing proxy fights.] Its moved upscale. The reason for that is a correlation between overall investor confidence and stock market performance. During times of tough markets, we always see an increase in proxy fights as investors look at their investments and start asking questions.

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Cristina Circelli, General Counsel, CN Railway

Soliman says he has been involved in about 40 proxy battles over the past three and half years, representing both corporations and activist shareholders. He agrees that the level of activity has increased substantially since 2008; more important, though, he says that were going to continue seeing an increase [in proxy fights] in Canada mainly because theres evidence of success, whereas in previous years, many shareholders sat back and hoped that their board would turn things around. Now they know that if they spend some time and energy, they will achieve what they are looking for.

This is rattling corporate Canada, says Solimans partner, Orestes Pasparakis, because these actions have been supported by relatively blue-chip investors, meaning if these institutional investors see a way to do a better job than the management group, they wont hesitate to take action. Companies at risk, Pasparakis says, are underperformers in any sector and of any size. No firm should believe it is not vulnerable if management is not perceived to be performing.

For example, if every company in a specific sector is down by 20 per cent in the stock market but youre down by 30 per cent and shareholders perceive that management has made bad decisions then your firm would be susceptible. Even if the company is down by the same margin as its peers, it could still be risk if it shouldnt be down by that much, or if its up but is not keeping pace with its competitors. The fact were in a bear market is not the driver, Pasparakis notes. Really, its all about the relative performance of the management team. This will always occur in a competitive landscape.

So, when stock markets and the economy bounce back, dont expect shareholder activism to fall off. Hall adds: Its not just because a company is operating badly. In many cases, these are opportunistic moves. There are cases in which companies are doing well, but they were still subject to shareholder activism. Take Magna [Internationals 2010 proxy fight] as an example. It was a very well performing stock but it still had to deal with shareholder activism.

The Magna situation was based on shareholder disagreement with founder Frank Stronachs compensation another reason why shareholders are willing to take on these firms. Says Allen: A major red flag for investors is that there is no correlation between a companys performance, relative to its peers, and rising executive pay. As a result, he adds: Pandoras box has been opened. From now on, boards of large companies have to take notice of what happened in situations such as CPs in a relatively short time of about eight months. It went from 99 per cent broad support of the board to Pershing now having a majority.

Proxy fight playbook

Its not uncommon for corporate counsel to go into a proxy fight not knowing what to expect. Says Allen: The most regularly asked question I get from corporate counsel when a proxy situation occurs is, Whats going to happen next. Theyre completely unfamiliar or unprepared with whats going on or what the next step is going to be.

Hall recommends having a playbook ready that sets out what steps to take. You have to have a playbook developed in terms of how to deal with these issues, who are the experts that you need to have on stand-by in the event something happens, and how and when you need to put the team together to deal with a particular issue, he says. The issue may even go away just because of the fact the other side sees youre very prepared in terms of how youre going to deal with that situation.

Companies also should engage with shareholders at a greater level than ever before. Says Pasparakis: You have to know your shareholders. They will be the first to utter frustration and become aware of unusual activity. Many companies employing best practices in such situations are already doing this at a very high level. For example, Winnipeg-based Manitoba Telecom Services Inc. (MTS Allstream) has had a long-standing philosophy to engage with shareholders, says Paul Beauregard, chief legal officer and corporate secretary. We are one of the few telecom companies that have an in-person meeting with investors when we issue guidance. This has been very well-received.

Cristina Circelli, deputy corporate secretary and general counsel with Montreal-based Canadian National Railway Co. (CN), says shareholder engagement is a key priority for the company and must be maintained on a regular basis. Our engagement extends beyond interactions before, or at, our annual meetings, but rather, consists of year-round communication with our shareholders, our employees, the media and the general public, she explains. We take pride in knowing our shareholders and we work hard to build and nurture long-term relationships with them that are built on trust and respect.

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Alison Love, Q.C. Vice-president and corporate secretary, Enbridge

Maintaining such communications is also a critical risk-management tool. We try to meet with shareholders who bring up big issues We recently had requests from individuals in Vancouver to meet to discuss their opposition to the Northern Gateway Pipelines project, says Alison Love, vice-president and corporate secretary with Enbridge Inc. in Calgary. We try to be in front of any issue so were not surprised with a call from a shareholder group saying, We want to replace the board.

Another way to engage with shareholders but in a far more formal manner is through the proxy circular, which should adhere to industry guidelines and best practices. Every year, the Toronto-based Canadian Coalition for Good Governance (CCGG) issues a document on best practices for proxy circulars document. The 2011 version states that [s]hareholders expect the circular to articulate, in plain language, the governance practices and activities of the board, the qualifications of directors, the issuers executive compensation programs and risk-management strategy. Such disclosure assists shareholders in assessing the boards performance and its ability to work with management to determine corporate strategy and oversee the management of the companys primary risks.

MTS Allstream reviews this document thoroughly every year because the CCGG spends a lot of time going through hundreds of circulars, so its a very good starting point, Beauregard says. The company also takes the time to see what its peers and the leaders in disclosure are doing. This includes examining the pratices of U.S. issuers, which, he says, are far ahead of Canadians in a lot of areas. Similarly, the company talks to external compensation consultants who can suggest best practices that other issuers are employing before their documents even go to print.

Once thats done, Beauregard says, I take a half day off, sit back and think about what the board and its committees have done in the past year. This sounds very obvious, but a lot of issuers sell themselves short and dont disclose the really good things that their boards and committees are doing. He stresses that this is part and parcel of the changing nature of preparing proxy circulars. When I was younger, I went through a period in which circulars were fairly static documents and all you had to do was update the numbers and make minor changes. Now, thats no longer how it works. The document is evolving and you need to stay on top of how things are changing.

Putting so much work into its proxy circular has paid off for MTS Allstream: it won the first annual CCGG Governance Gavel Award for best disclosure of governance practices and approach to executive compensation by a small or mid-sized issuer. Meanwhile, CN and Enbridge both have won the CCGGs Governance Gavel Award for best disclosure of board governance practices and director qualifications; CN took the prize in 2011 and 2009 while Enbridge won it in 2006. Both firms emphasize keeping their documents shareholder-friendly and including the information that shareholders want to know about most.

We make every effort to describe our governance practices and compensation philosophies in plain English, says Circelli. With respect to the presentation of information, we attempt to communicate information in as easily digestible manner as possible, using graphs, tables and charts. We strive to anticipate and identify areas where shareholders would be interested in additional disclosure, such as our executive compensation practices, and then bolster disclosure in those areas. We are also responsive to hot-button issues in the field of governance and consider the latest recommendations and guidelines of proxy advisory firms and governance groups [such as Glass Lewis & Co. and Institutional Shareholder Services Inc. (ISS).]

As for Enbridge, the company takes some pretty innovative steps to improve its disclosure documents and to keep shareholders informed. One year, we retained the services of a writer who looks at companies disclosure documents and rewrites them in plain English. She tore it apart and started over, Love says, admitting that this was very valuable, but isnt a step the firm would take every year. Still, Enbridge consistently communicates through its website and social media because the written paper can be pretty dated by the time it gets out.

Being prepared, maintaining consistent and important communication with shareholders and preparing thorough, timely and easy-to-read disclosure documents are key to preventing and dealing with potential shareholder activism. Shareholders are becoming aware of the different alternatives to get companies to listen to their issues, Love says. So, companies have to be prepared. They need to have more people in legal, public affairs, as well as outside counsel and advisers involved. They need to spend more time and money to adequately respond to concerns.

Pablo Fuchs is a freelance writer based in Toronto.