Dundee faces backlash over new share-exchange plan

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A proposal that could give Toronto holding company Dundee Corp. financial breathing room is facing a backlash on multiple fronts.

Dundee's share-exchange plan has raised the ire of a prominent fund manager, a high-profile shareholder rights group and – according to multiple sources – has caused consternation among the company's institutional shareholder base.

Dundee is under financial pressure, having lost more than $400-million in the year to date, primarily due to heavy exposure to the cratering resource sector. Last week, the company unveiled a proposal designed to take pressure off its balance sheet.

Dundee currently has $107-million-worth of Series 4 retractable preferred shares outstanding, which are due to mature next summer when shareholders can request to be paid out in full, in cash. Dundee is offering holders the opportunity to switch to new Series 5 shares that won't mature until June 30, 2019. In exchange, shareholders will be paid a 6-per-cent dividend instead of the current 5 per cent. Dundee is also offering to pay shareholders and their brokers roughly 1 per cent each of the value of the shares as a one-time cash incentive. These "consent payments" are due only if a shareholder votes "yes" and the proposal is passed.

James Hymas, president of Hymas Investment Management Inc., says these payments, which are roughly eight times higher than average, represent "a huge conflict of interest" for brokers and are "coercive" to shareholders.

"You get money for voting yes. But if you vote no and the offer goes through anyway, then you get squat. That makes it coercive," Mr. Hymas said. He runs a preferred share mutual fund and publishes a daily commentary on preferred shares. Neither he nor his clients have any position in Dundee's preferred shares.

Dundee chief executive officer David Goodman defended the proposal.

"I believe our structure is fair. It's transparent. It's in the best interest of Dundee Corporation and it's consistent with industry custom," he said in an interview.

While Dundee's preferred shares are predominantly owned by retail investors, the company also has a small contingent of institutional shareholders. According to multiple sources, they are not happy either. These shareholders would much rather be paid out in cash once the shares mature in the summer, the sources said. If they attempt to sell major positions in the open market, they likely would have to accept a steep discount, as liquidity is low. Nor do they like Dundee's use of incentive payments.

Offering solicitation fees to brokers is not entirely uncommon in Canada. Recently, Canadian Oil Sands Ltd. accused Suncor Energy Inc. of paying advisers to convince clients to agree to tender to Suncor's hostile takeover offer for the company. In 2013, Agrium Inc. offered payments to advisers if their clients voted in certain board members.

"These types of payments are deeply troubling," said Neil Gross, executive director of FAIR Canada, an independent shareholder rights advocacy firm.

"It's not just that they give advisers a financial incentive to bias their advice. It's that they do it so overtly – revealing that the financial industry still hasn't internalized the principle that conflicts of interest are incompatible with investment professionalism."

In the case of Dundee's offer, only around $1-million would be spread among many brokers across Canada, so it is unlikely that any one individual would make a sizable amount on the incentive fee. Mr. Goodman says one of the reasons the payments are necessary is that Dundee needs brokers to get the word out about the vote. He also said he has no concerns about advisers giving biased advice in this instance.

"I have a very high appreciation for the integrity and value that the financial advisers provide and I don't believe that the receipt of a solicitation fee for their services is going to compromise their ability to properly advise their clients."

Two-thirds of voters must approve the proposal for it to pass.