How to beat activists in 2015
With the 2015 proxy season approaching and shareholder activists promising to torment corporate Canada throughout the year, IROs are on the hunt for any sort of data, tool or insight that will help give them an edge and formulate a winning strategy. Increasingly, that quest has led them in the same direction: toward each other. And so it was last week as dozens gathered on the 11th floor of Toronto’s RBC Centre for the fifth annual IR Magazine Investor Perception Seminar – Canada.
Attracted by its highly interactive format, IR practitioners from around the country came to network, discuss common challenges and learn how the discipline’s best and brightest are planning to overcome them. As experts addressed a range of topical issues via lively, room-wide and breakout sessions, the activism file was clearly top of mind.
‘We will see a lot more activism ahead in 2015,’ predicted Walied Soliman, partner and co-chair of the Canadian special situations team at Norton Rose Fulbright. ‘The role of the IR group will become critical, relied upon by both boards and management teams.’
Soliman urged IROs to take the lead in assessing their firm’s vulnerability to activist threats and forging a robust response plan: ‘Think how impressive it would be if on the first day [an activist situation is revealed] you could walk into the boardroom and say, Here’s what we have to expect. Here’s our vulnerability. Here’s our team. Now give us instructions, as opposed to saying, This just happened today. We are trying to figure it out and we are convening again tomorrow afternoon.’
Soliman, who spends as much time representing activists as defending companies, underlined the advantage of having in place a clear ‘in case of activist, break glass’ protocol. ‘The activist team is small and nimble,’ he said. ‘Usually, it’s one guy making all the decisions in seconds. Companies have got to figure out a way to be organized. Otherwise, their response time can be almost comical.’
For Soliman, preparedness begins with a vulnerability assessment. He pointed to several holes in the corporate armor that can alert activists to blood in the water. And one prevailing signal is the smell of moldy old AGM procedures and bylaws.
‘I find some of the most amazing things in old bylaws,’ said Soliman, who described the steps that lead up to him scrutinizing your corporate fine print. ‘Once an activist has decided you are a good target – after it has spoken with analysts and perhaps shareholders – its next call is to us. And one of the key components of our diligence exercise is an examination of a company’s constating documents. If bylaws haven’t been updated since 1982, chances are my memo to the hedge fund manager [will contain encouraging news].
‘On the other hand, if the bylaws present a very clear and rigorous regime as to how an AGM is conducted, the message we’ll send back may be that although the company looks like a great target it seems to [be run by] people who have their act together. Perhaps you should move on to another company with a less attractive return profile [but offering more chance of victory].
‘And God help companies that think they are going to change their documents after I come knocking on their door. If they try to, they will get in trouble.’
Beyond plugging legal holes, Soliman also addressed the human element: ‘The first thing I ask a CEO who’s beginning to worry his company may be under attack is, Can you think of two directors within your universe who would be considered far superior to your two weakest directors? Because when it comes to board change, that is where your vulnerability lies – not with your overall board. If the answer is yes – and it usually is – then that is a vulnerability that you at least need to understand.’
Once a company has assessed its vulnerability and fixed its fixable problems, it can then move on to establishing a response plan. Pointing to two ongoing trends – the emergence of the so-called ‘candlelight dinner’ and the rise of activism in transaction settings – Soliman again underlined the critical role the IR team can play.
‘The candlelight dinner is one of the most dangerous events a CEO can participate in,’ declared Soliman. ‘Activists will claim to have no gun in their pocket but they always have an agenda. Part of their objective is to determine whether they can work with your CEO. It’s an interesting dynamic because the better a host your CEO is, the better a target you may well become.’
While a CEO may be convinced he or she can handle it, Soliman urged IROs to do their best to play the gatekeeper. ‘There must be a protocol in terms of escalation,’ he said. ‘That way you don’t look like you are slamming the door in anyone’s face.’
The M&A arena will be another area where IROs must be prepared to challenge senior management. Soliman noted activists’ increasing disposition to impinge on transactions. ‘Activists are looking very much at how your transactions are structured to see if they can either mess you up or get more out of you,’ he said. ‘We are seeing a lot of gaming around things like dividends and share buybacks.’
He singled out appraisal litigation as a concern. ‘IROs must be prepared to challenge legal groups and CFOs on both the premise and structure of deals,’ he explained. ‘For example, not every structure attracts dissent and appraisal rights. That sort of input continues to be surprisingly missing around the table when these deals are put together. It won’t come from the CFO’s group, and certainly not the legal group. It comes from you guys.’
Soliman also reiterated his position that Canada’s securities regulators would not allow a voting pill to stand if it would hinder proxy fights. ‘Fundamentally, in Canada, you have the right to engage in solicitation activities,’ he said. ‘Any pill that limits solicitation will never be allowed.’ He does, however, believe some changes to traditional pills will be allowed. ‘We will be seeing pills as a tool to put the ‘pause’ button down on certain proxy battles,’ he added. ‘We will not see them as a tool that prohibits proxy solicitations in Canada.’
Soliman offered a final pointer when putting together a response plan: buy up all the proxy solicitation firms. ‘For larger companies, I’ve often suggested you hire all of them; keep them on retainer, certainly the best ones. Because these guys coming to fight you are going to hire the best. You’ve got to knock them out on that one as best you can.’
Word of mouth: other quotes from the seminar
– Yvette Lokker, president and CEO of CIRI, reported that a lot of companies are providing guidance. A CIRI survey found 87 percent of firms provide either financial or non-financial guidance, mostly annually, while 61 percent of issuers provide earnings guidance, usually in a range. ‘We couldn’t find a large Canadian company that has ceased to give guidance,’ said Lokker. ‘All in all, it looks like [the level of guidance] will remain basically unchanged in the future.’
– A fund manager on the future of ESG: ‘Institutions doing due diligence with us ask whether [we incorporate ESG issues in our analysis]. If our answer is ‘no’, a potential client may slip away.’ And on her reason for wanting to see your CEO: ‘From my perspective, it’s not the deep dive into numbers or the strategy. It’s about seeing the people at the head of the organization and understanding their leadership style. When they come across poorly, or are dismissive of their investors, it sends a message about how they behave within their own organization. And it rings an alarm bell for me.’
– An analyst on staying reality-based: ‘It’s a tough job from an IR perspective to stand in front of investors and say the internet will have no impact.’