Activist investor Bill Ackman, chief executive officer and portfolio manager of Pershing Square Capital Management LP.BRENDAN HOFFMAN/Reuters
Canadian companies should brace for more shareholder angst, regulatory change and the rise of homegrown activist investor battles next year.
After a year of proxy fights that included the high-profile Telus Corp. and Mason Capital Management LLC, and Agrium Inc. versus Jana Partners LLC, several trends have emerged that will change the way battles for company control are fought and won in the future, according to a panel of two Norton Rose Fulbright lawyers and one proxy adviser.
The three experts weighed in on Canada's position as an activist-friendly jurisdiction, and how shareholder ownership disclosure rules and advanced notice bylaws will reshape the battles of the next year.
"I think activism is the flavour of the day. I think people believe activists can get higher returns – we're seeing pension money going into activist funds – so I expect that we're going to see more and more Canadian activists," said Orestes Pasparakis, a partner at the firm's Toronto office.
That doesn't mean the new entrants will be successful, though.
"I also think we're going to see them getting beat up, because it's harder to be an activist than you think it is ... it's a real fight," he said.
Investors should also expect to see more U.S.-based investors targeting Canadian large-capitalization companies, said Walied Soliman, partner at Norton Rose Fulbright.
And companies on either side of a fight shouldn't underestimate each other, added Wes Hall, chief executive officer of shareholder adviser firm Kingsdale Shareholder Services Inc. "The only place that slam-dunk belongs is on the basketball court ... a lot of people underestimate the money and the time [a proxy fight] takes."
Here are some of their other predictions for 2013:
On early warnings
The Canadian Securities Administrators proposed back in March to reduce the amount of shares an investor can amass before hitting the early warning disclosure threshold, alerting management to the position. The current ceiling is 10 per cent and the CSA is proposing to roll that limit back to 5 per cent, which Mr. Soliman forecasts will happen next year. Mr. Hall says such a change would make Canada less attractive to activists.
On debt vs. equity
Proxy battles are often fought after dissidents acquire a slice of the firm's equity shares, but 2014 will bring a lot more activists on the debt side of the company's capital structures, Mr. Soliman said. He has seen an increase in the number of funds that have taken a distressed debt approach to accumulating debt and thinks it will be an area where there will be more work in the future.
"Companies and their boards need to be much more attuned to how their trust indentures work and what it means to accumulate a blocking position ... because we're getting calls on these with increasing frequency," he said.
More CEO dumps
The fight between activist Bill Ackman's hedge fund and Canadian Pacific Railway Ltd. gave way to the trend of companies removing their CEO to try to head off a fight with an activist, and then trying to sell shareholders on a change in direction.
"We've seen a number of times this year where there's concerns about performance and the board decided to buy time by putting in a new key manager," Mr. Pasparakis said.
On what companies should do now
Close to 600 companies trading on the TSX have put in place measures that would force dissidents to give 30 days notice before nominating a new slate of board directors. Mr. Hall thinks others should follow suit by creating a so-called advanced notice bylaw to protect shareholders and stop companies from being surprised by dissidents at annual meetings. But just "don't get too creative with it," he said.