The feud over the future of Maple Leaf Foods has erupted into a high-stakes battle that pits a Bay Street hedge fund against some of the most respected leaders of the Canadian business establishment.
Shortly before markets closed Friday, minority shareholder West Face Capital Inc. announced it is launching a proxy battle to reduce the McCain family's influence at Maple Leaf Foods by initiating a process to nominate a new slate of independent directors.
Investors rarely resort to proxy battles because they are expensive and can destabilize the target company's business.
By taking aim at Maple Leaf Foods, West Face and its activist founder Greg Boland are challenging the McCain family and leading Canadian business figures such as veteran Bay Street lawyer Purdy Crawford, Woodbridge Co. Ltd. chief executive officer Geoff Beattie and former Ontario Power Corp. CEO James Hankinson.
In a statement, Mr. Hankinson said West Face's move would launch "a costly, and unnecessary process," and called it "unproductive and contrary to the best interests of Maple Leaf Foods and its shareholders."
West Face said in a publicized letter to Maple Leaf on Friday that there are "deficiencies … in critical areas such as board independence and corporate governance."
At the heart of the dispute is a conflict over CEO Michael McCain's ambitious plan to expand and modernize the company's facilities to increase profit margins and stay competitive with larger U.S. rivals. West Face is believed to be opposed to the $1-billion plan. Although Maple Leaf has logged six consecutive quarters of profit growth, investors have been frustrated that the stock continues to trade well below 2007 levels.
Ontario Teachers' Pension Plan moved in recent weeks to sell its holdings in Maple Leaf Foods at a steep discount and relinquish its two seats on the board, signalling it doubts the company's chances of a turnaround.
Sources said it was after the Teachers sale that West Face began stepping up pressure on the company to overhaul the board, which includes independent directors such as Mr. Crawford, Mr. Beattie and Mr. Hankinson.
Tom Dea, a partner at West Face, said in a statement that after having been "rebuffed on several occasions when we have raised these concerns with management and the board of directors, we have concluded that the board needs to hear a strong message from shareholders that the independence and governance practices of Maple Leaf do not satisfy their expectations or today's standards of good corporate governance."
A spokesperson for Maple Leaf Foods declined to comment.
In heavy trading after the announcement, Maple Leaf Foods' stock jumped 44 cents to close at $11.62 on the Toronto Stock Exchange.
The McCain family holds a minority 31-per-cent stake in the food-processing and bakery company. Despite private complaints from Teachers and other investors about the costs of Mr. McCain's expansionary strategy, he has the backing of a majority of company directors.
After months of on-again, off-again discussions, sources said West Face proposed last week that Maple Leaf reduce its 14-person board to nine directors. The fund requested that all the company's existing independent directors be replaced with six new directors, each of whom would have no financial or business connections to Maple Leaf Foods or the McCain family.
According to sources, West Face described its plan as a compromise solution that would see Mr. McCain retain the CEO's job and his brother Scott and father Wallace retain their board seats. After a meeting this week with Mr. Hankinson, the lead director on a special boardroom committee at Maple Leaf Foods, sources said West Face officials became convinced the board was unreceptive to their plan. Frustrated with the lack of progress, West Face decided Friday to pull the trigger on a proxy battle to win support for new directors.
Sources close to Maple Leaf Foods countered that West Face had acted precipitously because the board was still reviewing the fund's proposal. Indeed, the fund announced its proxy battle one hour before a committee of the board was set to meet on Friday to consider a response to the fund.
West Face has a history of taking on underperforming companies. The firm in 2008 requisitioned a shareholder meeting of ACE Aviation Holdings, the parent of Air Canada, to try to replace that company's whole board. In the end, there was a truce when West Face received a seat on the board.
In addition to activism, the company has made outsized returns buying underpriced securities. The firm made big wins by buying into Stelco when it was restructuring, Saskatchewan Wheat Pool when it was in financial trouble, and oil sands company UTS Energy Inc. before it was sold to Total SA of France.