Concerned shareholders stepping into the proxy battles over boards

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Deep in the forested hills of central Sweden, near the town of Ostersund, lies what Toronto-based junior mining exploration company miner Continental Precious Minerals Inc. says is a massive untouched deposit of uranium, nickel and other minerals.

Thousands of kilometres away, in downtown Toronto, the company's shareholders are voting on Thursday after a bitter proxy fight between Continental's board and a critical shareholder touting his own a slate of candidates. The dissidents question whether Continental's Swedish project is still viable after the slump in uranium prices that followed Japan's Fukushima nuclear disaster.

It's a small fight, receiving far less attention than the recent headline-making proxy battle at Canadian Pacific Railway Ltd. But it is the latest skirmish in a rise in the number of proxy battles facing boards across Canada this year. And some say Continental's fight illustrates a growing trend: shareholders taking on boards not only because stock prices have sunk, but also about questions of corporate governance.

Continental's sinking share price, which plunged to 18 cents after trading as high as $5.10 in 2007, has certainly raised investor concerns. But the dissidents have also taken aim at a company by-law that mandates a quorum of 50 per cent of the company's outstanding shares for the election of directors – a rule that the dissidents blame for the fact the company hasn't held an election for directors in 16 years.

This is why Toronto lawyer Carmen Diges, head of Miller Thomson LLP's mining group, said she has taken the unusual step of standing as a candidate for the board on behalf of the shareholder waging the fight, Sharad Mistry.

Ms. Diges said she became interested in the battle over Continental after she saw a recent judgment in a hard-fought legal battle between the board and another group of dissident shareholders who tried to challenge Continental's board and its 50-per-cent quorum rule in court, and lost.

"As a professional, at some point, you have to stand up for the principles of corporate governance," she said in an interview.

The dissidents cite a report from proxy advisory firm Institutional Shareholder Services Inc., which they say supports their views and calls the 50-per-cent rule "highly unusual" and a possible tool of "entrenchment" for management.

But the company has come out swinging. Ed Godin, Continental's long-time CEO, defends the Swedish uranium project as economically viable in the long term. He also defends the 50-per-cent rule, saying it is needed to protect the company from "opportunists" he says are attacking when the share price is low and whom he claims are mostly interested in the firm's $12-million in cash reserves.

Mr. Godin says Continental's shareholders would be much better off under his plan to prove that the Swedish site, with continuing geological work, is economical as a future mine before selling it to a large mining firm: "It's got a 60- to 70-per-cent chance of becoming one of the world's biggest mines. But it's not going to happen overnight, and it takes patience."

It seems that investor patience may be running out, however. Ms. Diges said Wednesday that her group had secured the support of more than 50 per cent of shareholders to replace the board.

And Mr. Godin acknowledged that Thursday's result was too close to call, after a judge on Wednesday dismissed the board's last-ditch attempt to have some shareholder votes disqualified over alleged improprieties.

Riyaz Lalani, chief operating officer of Kingsdale Shareholder Services Inc., a Toronto proxy firm, said the number of proxy fights is up dramatically in Canada this year, with at least 36 such battles. That's more than the 22 last year and approaching the high of 40 in 2009.

Mr. Lalani, whose firm is acting for Continental but who stressed he was not speaking about any case in particular, said increasingly shareholders are taking stands based on corporate governance: "Especially after CP, shareholders are very aware of the tools available to them under the law."

Lawyer Carol Hansell, a senior partner with Davies Ward Phillips & Vineberg, said situations such as Continental's illustrate the new reality for boards, which can no longer ignore possible challenges from even tiny shareholders. She agreed that a 50-per-cent quorum for board elections is unusual, but adds that said while many in proxy fights raise corporate governance concerns, these battles are usually driven by dollars. "There's a lot of governance imperfections that people are okay with as long as they are making money," Ms. Hansell said. "And then when they are not making money, it is one of the things that has to be fixed."