The Maple Leaf Foods Inc. saga is moving ever closer to a clash between activist shareholder West Face Capital Inc. and the company's board.
West Face, the activist shareholder that owns a big stake in the meat and baked goods producer, has so far been quiet about its intentions. But behind the scenes, the hedge fund is clearly laying the groundwork for a proxy battle at the company, which has long been a laggard when it comes to stock performance.
West Face owns about 10 per cent of Maple Leaf and is understood to be at odds with the Toronto-based company on three fronts: leadership, strategy and corporate governance. Maple Leaf shows no signs of budging on the first two: It's sticking with long-time chief executive officer Michael McCain, and holding fast to his plan to invest more than $1-billion in new plants and equipment to try to drive up profits.
A move to replace the board is the final, and most drastic, lever at West Face's disposal. Board battles are messy and difficult, but the sudden shift in the shareholder base of Maple Leaf has created an opening for change.
As 2010 dawned, Maple Leaf was a company controlled by an alliance of the McCain family and the Ontario Teachers' Pension Plan, which had worked together since teaming up to buy the company in 1995. Today, Teachers is gone, having sold the last of its large stake in Maple Leaf via a public offering last week, not long after the two Teachers nominees on the Maple Leaf board resigned amid a dispute over how best to pursue Maple Leaf's strategy.
But the board is still much the same as the one that was constituted back when the McCains and Teachers were allies. West Face can now make the argument that this doesn't reflect the new reality that Maple Leaf is suddenly a much more widely held company, and that new blood is required to rejuvenate the business. Among Maple Leaf shareholders, there is support for this line of thinking.
Three members of the McCain family are on the 14-seat board: Michael McCain, his brother Scott McCain, and their father Wallace. That number is in line with the family's ownership of about a third of the company. Four more independent members of the board have been there since the 1990s.
Some non-McCain directors also have close ties to the McCain family. Maple Leaf lead director Purdy Crawford, for example, who is listed as an independent director, is a long-time friend of chairman Wallace McCain. Mr. Crawford also sits on the board of McCain Capital, the family holding company, a fact that is not disclosed in Maple Leaf's regulatory filings.
Mr. Crawford, who joined the board in 1995, rejects any notion that he is not independent of the McCains. "Under the securities rules and guidelines, I am an independent director of Maple Leaf."
While Maple Leaf's performance and board composition may provide some ammunition to critics, any attempt to oust the board will not be an easy battle.
Mr. Crawford contends that "the board is a good board." Backing that up, Maple Leaf placed 31st out of 187 companies in The Globe and Mail's most recent annual ranking of corporate governance practices in Canada.
What's more, while Teachers' departure may have created an opening by changing the dynamic from a closely controlled company to one that's widely held, the pension fund's sale of its stake also means more legwork for West Face. No longer does the hedge fund have one large potential ally in any fight to shake the company up. It must now rally support from a diverse pool of shareholders.
Thanks to Teachers, Maple Leaf also has a golden opportunity to blunt any criticism that its board doesn't represent that diversity.
There are two spots on the board now open. Mr. Crawford said new directors will probably "be reflective of the new shareholder mix, which is much more than West Face."
Mr. Crawford said he expects the board's governance committee, which he is a part of, will nominate new directors shortly, rather than waiting for the annual meeting, which is generally held in April.
So one way or another, the board of Maple Leaf is changing. The question remains: How drastically?