Shareholder activism has long been the privy of American investors. Legendary activists such as Carl Icahn or Daniel Loeb at Third Point, among others, have had a noticeable impact on American corporations; and a new breed of activists such as Bill Ackman at Pershing Square continue to carry the activist torch.
Canadian investors, on the other hand, are more docile and Canadian boards are not that accustomed to the abrasive or often aggressive style of activist investors. Having lived in Canada for many years, I believe the difference is largely cultural. Canadian investors are no less motivated to unlock value; they, however prefer a softer approach. Canada does suffer from a level of elitism that is possibly the product of Canada's attachment to the British empire and thus the European heritage of a certain class division between the noble wealthy elite and the common citizens.
On a personal level, I have always been fascinated with shareholder activism; it appealed to me as an activity that satisfies both my interests of wealth creation and social justice. What is better than getting wealthier, while benefiting scores of disadvantaged shareholders in the process? Some activists go further still by arguing that activism cuts corporate waste, renders companies more accountable and more efficient and thus activism is a service to the economy and society as a whole.
I am quite encouraged by the progress of shareholder activism in Canada. Bill Ackman's victory at Canadian Pacific Railway (CP) was a seminal moment that shook the largest Canadian boards to the core and showed the largest Canadian corporations that they are not immune to the discontent of their owners. Most recently, the well-known activist hedge fund Jana Partners took an interest in the Canadian agriculture producer and distributor Agrium (AGU) in an effort to further enhance shareholder value through the separation of the company's retail unit from its core agricultural operations.
It is quite surprising that shareholder activism in Canada - while growing - is still relatively limited, despite the fact that Canadian corporate law is friendlier to activist shareholders. For example, Canadian activist investors don't have to wait for the annual shareholder meeting to proceed with board nominations, nor are they limited to the nomination of a few directors at a time; any shareholder with a 5% stake may request a special shareholder meeting. From Osler, Hoskin and Harcourt:
Canadian corporate statutes allow shareholders holding at least 5% of the issued shares of a corporation to require directors to convene a shareholder meeting for a broad range of purposes relating to the business of the corporation so long as they respect certain prescribed criteria. After receiving a requisition from a shareholder or a group of shareholders, the directors of a company have 21 days to call the meeting. If the directors fail to do so within the 21 days, any shareholder who signed the requisition may call the meeting on its own. In practice, if the resolutions they put forward are passed, the corporate statutes entitle the shareholders to reimbursement from the corporation for all expenses incurred in relation with the meeting.
Canadian shareholders also have the option to proceed with a "shareholders proposal", which is a cost-effective way to engender change in a given public corporation:
Another device available to shareholders under Canadian corporate law that has seldom been used outside of the bank context is the "shareholder proposal" concept described in the Canada Business Corporations Act (the CBCA),s. 137. This allows a shareholder to circulate a proposal to shareholders with a supporting paragraph containing not more than 500 words relating to the topic the shareholder wishes to raise at an upcoming shareholder meeting, including presenting proposed director nominees.
What is interesting about the "shareholder proposal" is that investors with 1% of the shares or at least $2,000 worth of shares may proceed to submit such a request to the board of directors.
My own experience with shareholder activism
As highlighted earlier, I do have a certain interest in shareholder activism. However, despite a 15 years investing career, I never had the chance to be fully involved in a public activist battle until earlier this year, through my efforts to unlock value at Equal Energy (EQU).
Equal Energy is a Canadian oil and gas producer with assets in Canada and the Unites States. I found the company to be an excellent activism target, because the company's underlying assets were trading at a significant discount to their real value - due to errors in strategy rather than an actual impaired asset base. Meanwhile, the strategy to unlock that value was quite straightforward and consisted of a divesture of one of the company divisions in order to reduce debt, better position and fully unlock the value of the remaining division.
In February of this year, I approached Equal's management with a letter highlighting a certain level of dissatisfaction with the company's strategy. Shortly after I sent that letter, I received a call from the company's CEO, Mr. Don Klapko, and the CFO, Mr. Dell Chapman. The conversation was courteous; the CEO was quite guarded, however, and appeared displeased with my advances, while the CFO was a bit more consolatory and alluded to a general agreement with my position that the status quo was not an option for the company.
It was clear, however, that a letter and a phone call was not going to do it; I needed the support of the company's shareholders, the real owners of this company, and not their employees as represented by the management team.
In order to gain the support of the shareholders, I employed a dual strategy: one targeting the retail investor base and the other targeting the institutional investor base. The retail shareholder base presented a strong pressure force due to the sheer number of participants, while the institutional base provided a strong clout due to its access to the management team and its access to large funds.
Reaching out to the retail investor base
When I first started my activist campaign, 85% of the company's shares were owned by retail shareholders and only 15% by institutions. Thus, winning the battle entailed winning the hearts and minds of the retail base, but unlike the clearly-defined institutional base, the retail base was dispersed throughout Canada and the United States. Reaching out to all of them would be a gigantic and expensive task.
The internet proved a solution of sorts; I decided to start a campaign on the company's internet message boards such as Yahoo Finance, Investor Village and Stockhouse. I also supplemented the campaign through a simple and clear investor presentation and a series of articles published through Seeking Alpha.
The plan worked: in a matter of weeks, I garnished the support of 50 private shareholders representing about 10% of the outstanding shares. The majority were small shareholders, but a few had very large stakes and all have pledged their support to my activist efforts. This is, of course, in addition to my own stake, which I built over time to just under 5% of the outstanding shares.
Reaching out to the institutional investor base
Reaching out to this shareholder segment was easier since I knew who held what and how to reach them. However, convincing them was another story; unlike the Ackmans and Dan Loebs of the world, none of those institutions knew who I was or whether I was credible in my activist efforts.
No matter; I gathered the contact information of institutions registered with the SEC as institutional investors in Equal Energy and proceeded to contact them one by one.
To my surprise, the reaction was quite favorable: most of the hedge fund managers I spoke to were initially skeptical, but quickly changed their tune once they listened to my plans. Within a few weeks, I enlisted the support of Equal's largest institutional investors, with one notable exception: no Canadian institution joined the effort!
I would say it was striking how guarded the Canadian institutional base was. While many expressed support, none of them accepted to formally endorse my efforts. I remember clearly what one of the largest Canadian institutional shareholders said to me: "we sympathize with your efforts, we see merits in your plans, but it is our policy not to get involved with activism". It was hard for me to understand this position: those were owners of Equal Energy, but yet they refused to use their right as owners to press the management team to do the right thing. If they were private shareholders I would respect their decision, but as stewards of investors' wealth, I believe their position was a breach of fiduciary responsibility to their clients who trusted them with their money. It is worth noting that the majority of the Canadian institutional base has abandoned the company since then.
Despite the lack of Canadian support, I managed to gather the support of an institutional investor base that represented about 6% of the outstanding shares, or about 40% of the institutional shareholding at the time.
Got the support. Now what?
Now that I had the support of a large swath of the retail and institutional base, what to do with all this support? I wasn't going to start a proxy contest just yet; a proxy contest is a lengthy and expensive endeavor and I kept it as a last resort. So what to do?
At this stage, the choice was simple: unleash the power of the shareholder base on the company. My goal was to overwhelm Equal Energy's management with a massive campaign of letters, faxes, emails and phone calls. I spearheaded the campaign by a series of letters and articles sent to or directed at the company and its board of directors. At one point, I was sending a fax every 48 hours! Meanwhile, I requested the 50 supporting retail shareholders to proceed with their own pressure campaigns and likewise for the institutional base: I requested that they use their leverage and access to the management team by directly asking them to support my plans, or at least proceed with a strategic review to study viable alternatives.
Shareholders delivered; over a two-month period, both private and institutional shareholders bombarded the company with emails and phone calls in support of the activist campaign. Many of them sent me a copy of their letters and some requested that I provide them with a model letter to send.
May 11 - Line in the Sand
I decided to draw a line in the sand and chose May 11 as deadline for the company to respond to shareholder's demands. May 11 was not an arbitrary number: it was the date of the company's annual shareholder meeting in Calgary, Canada. I made it clear that a showdown was in the cards for May 11 if the company failed to act. In order to further up the pressure on the company, I contacted the entirety of the analyst community covering the company. I informed them of the activist campaign and invited them to attend the shareholder's annual meeting on May 11 to witness the epic Calgary battle! I also reached out to the local press and invited as many journalists as I could to that event.
I focused so much on May 11th as the deadline for the company to act, that one of the supporting hedge funds who was in regularly touch with the company called me and asked: "What are you planning to do on May 11? The company's management seems very concerned about May 11 ". I responded by saying that it is quite similar to a horror movie: sometimes what scares the audience is the thought of what's behind the door, and not necessarily what's really behind the door.
Efforts to recruit outside support as the first Victory is Achieved
In an effort to garner more support for my activist campaign, I decided to contact established activist hedge funds. While I did have a few relations in the investment community, none of them was in this line of business. However, having no contacts has never stopped me in the past. I gathered the names of well known activist hedge funds in the US and Canada and started contacting them one by one.
On April 30, I got a break and I received a response from Peter Feld at Starboard Value, a prominent activist hedge fund well known for its involvement in the activist campaign to unlock value at AOL Inc (AOL). While Peter mentioned that Equal is too small for them, he introduced me to David Lorber at Frontfour Capital; another well known activist hedge fund, known for its campaign to unlock value at Fisher Communications (FSCI). David expressed interest in the idea and proceeded to do his due diligence on Equal Energy. However, three days after my contact with him and eight days before the May 11 deadline, a key victory was achieved when Equal Energy hired Scotia Waterous and declared a strategic review on May 3 (which also happened to be my birthday!). With the review in progress, the need to involve outside parties greatly diminished.
The initiation of the strategic review was a major victory, but of course the battle to unlock value at Equal Energy is still ongoing. With the company choosing a new, more suitable chairman and hiring Scotia Waterous to undertake a comprehensive strategic review, Equal addressed many of the shareholders' demands. In light of the CEO and chairman's personal assurances to me of their commitment to concluding the strategic review successfully, and the natural consequence of a full-fledged proxy fight should the review fail to produce a material outcome, it is highly likely that the review will conclude to shareholders' satisfaction.
A successful conclusion should lead to a 50% to 100% appreciation in the value of the shares, and thus finally offer Equal's shareholders a proper valuation for their assets.
It is true that an activist campaign is not an easy endeavor: investors usually vote by selling their shares and moving on to greener pastures. I believe this is the wrong strategy; investors should not give their employees a pass. Any company's management and board of directors have a fiduciary responsibility towards their shareholders and breaking this responsibility entails consequences. The onus of enforcing that responsibility falls on the shoulders of shareholders: shareholders have only themselves to blame if they tolerate the slacking of their boards or managers.
I have come to learn early in life that everything that is worthwhile in life requires hard work, patience and determination. Major accomplishments are not given but earned. If you are stuck with the wrong management team or an ineffective board, you need to go and make a difference. Don't let the inertia of inaction rule the day. As the renowned author and politician Edmund Burke said:
"The only thing necessary for the triumph of evil is for good men to do nothing "
While I wouldn't go as far as labeling ineffective management teams and boards of directors as 'evil', I believe that the premise of Mr. Burke's statement fits perfectly with corporate inefficiency and shareholders inaction.
Finally, it is important to differentiate between the executive level employees and mid-level to lower-level employees. The latter is often as much a victim of ineffective management as the shareholder base. The thrust of the activist process should focus on the higher echelons of management, and in the case of a corporate transaction or downsizing as a result of an activist campaign, the mid and lower-level staff should be compensated fairly and properly and so before any reward is passed to the shareholder base.