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Published: 2008-03-26

Proxy Wars: The Battle for Shareholder Approval



They're bitter, divisive and can get downright ugly. Proxy battles, like fierce political campaigns, can degenerate into mud-slinging, name-calling fights. And they're happening more often.

No longer content to sit on the sidelines and watch as their shares in a company plummet, more and more shareholders are standing up and holding management accountable. At Nortel Networks Corp.'s annual meeting in April, shareholders peppered the company's management with questions about what one called "the biggest financial disaster in Canadian corporate history." Nortel's stock had dipped to less than $6 a share from its July 2000 high of $124.50.

Shareholder activist Robert Verdun denounced Nortel's management for giving what he called "incomplete" information about issues, including financial statements and executive compensation. "I came here looking for this company to convince me you know you made mistakes. I want you to say 'mea culpa' in plain English. I want you to say 'we blew it,'" Verdun said. Questions by annoyed shareholders ended up turning the AGM into a four-and-a-half-hour marathon.

Other dissident shareholders have made their voices heard over the past couple of years as they launched full-scale battles to wrest power away from boards of directors. Shareholders have won their fights against the boards of directors at FPI Limited, Call-Net Enterprises, Takla Star Resources and Naxos Resources. And shareholders of several other companies have hired securities lawyers to mount challenges against the companies' boards. Such battles are rare but are on the rise, in large part due to the huge financial losses investors have faced.

A proxy fight is a tough, no-holds-barred game of strategy and communications that's played by shareholders, board members and their legal teams. And it's a lot of fun-at least according to Philip Koven, director, NATIONAL Investment Relations in Toronto, who says, "It's about winning the hearts and minds of shareholders. It's strategic and tactical. Proxy battles are unique."

Dale Lastman of Goodmans LLP in Toronto, who's been involved in several battles for control of a company, concurs with the "fun" description. "Nobody dies. This is just money and it's all done within the context of rules, it's all done in a fair way and it's strategic." He says he has fond memories of all those transactions, although he concedes that "every single one of them, when they occurred, was devastating to me."

Though they may be fun for some of the players involved, proxy battles are also hard to win. The dissidents who win are usually institutional investors with deep pockets or shareholders who already have a significant stake in the company. Dissidents must feel very strongly about tackling a company since the odds are stacked against them. Taking power away from reigning directors can be more difficult than unseating an incumbent politician.

But why do so many dissidents find it so difficult to take over? Koven likely hits the nail on the head when he says, "If you've invested in the company and the stock has disappointed you for whatever reason, by and large you don't want to admit you made a mistake. I think that's human nature. So you're inclined to give the benefit of the doubt to the company until they've really proven that they can't manage the thing, then maybe you'll finally get pushed over the edge. It is hard to convince people. They think you've got some other agenda if you're a dissident-and very often you probably do."

Control the Discussion
The communications campaign that's waged during a proxy battle is critical as both sides try to win over shareholders. The key is to get a playing field you can win on. It's vital from the outset to control the area of discussion that's going to be up for debate over the course of the proxy battle. The attacking party has the advantage because it can go after the corporation and try to set the agenda.

As with any struggle to win people's favour, managing public relations is a major factor in a proxy fight. Success is achieved by those who best use strategic communications to leverage their credibility, define their story, achieve personal contact with shareholders and control the agenda.

Team members can include lawyers, the client, a proxy solicitation firm and public relations people. "It helps to have a PR team on your side," Koven believes. "We have relationships with the media that we can tap into. It's really about using all avenues open-media, 1-800 numbers, whatever-to get your story out there and establish some sort of relationship or rapport with the shareholders, because you can't call them all."

Ultimately, the aim is to foster a sense of intimacy with shareholders and find a way to connect with them, says Koven. "It's a PR process in the purest form in that you're trying to win somebody's opinion.... At the outset, it's important to control the area of discussion that's going to be up for debate over the course of the proxy battle...get their attention, try to set the agenda, and then force the other side to respond.

"Hockey coaches will tell you the team that controls the flow of the game will win the game. The same is true in dissident proxy battles," Koven adds. "Lawyers play a key role in setting an agenda. Much of this comes down to the art of timing salvos. The strategy is to keep the opposition off balance and force them to react or dwell on one point while the other slate moves on to another. The desired end result is to define the battleground, or the issues that will influence the way in which shareholders will vote."

"You have to target who your audience is and strategically speak to your audience," says Lastman, who acted for coffee retailer Second Cup during its recent takeover by food service company Cara. During a hostile takeover bid or a proxy fight, the key players often read something negative about themselves in the media. "Their response always is to fight back on that issue...people spend a lot of their energy winning the media battle when it's really irrelevant to what they're trying to do. So part of what you have to do as a lawyer on a transaction like this is keep everybody's focus."

Don't get personal, Lastman advises. "This has everything to do with the bid and not the bidder." It's a normal human reaction in these kinds of conflicts that when the bidder and the target start trading salvos back and forth, suddenly people start pigeonholing each other as good and bad. "There are no good guys and bad guys. It's all about control and money." He adds, "It's really important to bear that in mind and not to say things that you will subsequently regret. It's a small world."

Dialling for Dollars
Georgeson Shareholder is the largest proxy solicitation firm in the world and has a major position in the U.S. marketplace, working on behalf of clients such as America Online, Inc., Cisco Systems, Inc., The Coca-Cola Company and The Procter & Gamble Company. The firm helps clients identify, locate and target messages to key shareholders. President and CEO Glenn Keeling of the firm's Canadian office says his company has positioned itself as the "go to" firm for hostile activity, and half of all the firm's business currently focuses on hostile or contentious work. "We are leaned on very regularly these days," he says, adding, "the Enron situation is making what used to be called the vanilla annual meeting a little less vanilla."

Institutional investors-banks, caisses du populaires, mutual funds, life insurance companies and pension plans-often make up a large chunk of a company's investors, which gives them a lot of clout. A last-minute change in sides from one of these major players can make all the difference in a proxy fight.

One of the important things that Georgeson undertakes is to confirm or expand upon what management thinks it knows about who its institutional shareholders are. "Obviously in these types of situations it's generally going to be the institutional shareholders that will sway the vote one way or the other," says senior vice-president Roy Shanks. "From an investor relations standpoint, knowing who shareholders are in any issuer firm is without doubt the biggest challenge an IR professional faces."

"It's a race to the finish line to determine when you have to get your material out, who's going to get the last material to the shareholder in time for that proxy to come back," says Susy Monteiro, who manages the proxy process for Georgeson. "It's a flurry of activity. You constantly deal with the communications group to put eye-catching material out there."

The battle for control of a company can be extremely complex and hard-fought, not unlike the 1999 Air Canada/Onex fight over who would control Canada's two main airlines. The communications strategy for both companies involved public relations firms, top-notch legal firms and hard-hitting advertising campaigns that included a toll-free phone number and a Web site.

Georgeson was hired by Air Canada during its fight with Onex. "I don't think people realized those ads were running in 43 different papers every day," says Keeling. 1-800 numbers went into the ads and the circular material, with Georgeson listed as the contact for information. "Management doesn't have the resources, time and energy to effectively field those calls...we work closely with the management of the firm to effectively answer all those calls for shareholders." The firm has about 2,600 representatives in call centres around the world, with five hundred seats in Toronto alone. Two shifts a day can operate in those seats, so the firm effectively has the ability to employ eight hundred to one thousand people in its Toronto call centre on any given day.

Keeling says, "There's a far greater degree of technical expertise required to successfully execute a proxy solicitation than there ever was in the past. There's a higher degree of sophistication among the shareholder audience, you have a greater focus on governance-related matters, how companies are run, how their boards of directors behave. You have a lot more shareholder activism in the marketplace as well, both institutional and retail. You have a lot of large events taking place."

Georgeson prefers to work with management. "We have access to more information. Working for a group that's taking over a company, you really don't have as much access to the vital information," says Keeling.

Most Bitter Battle
Although proxy fights are still uncommon, they often create big headlines. In what many observers describe as the most vitriolic proxy battle ever waged, Hewlett-Packard Co.'s proposal in September 2001 to acquire Compaq Computer Corp. for US$25 billion made the news repeatedly over the course of several months after board member and shareholder Walter Hewlett, as well as shareholders David W. Packard, The David and Lucile Packard Foundation and other family members opposed the takeover. The families felt the merger would force HP to become reliant on the lower-margin PC business and that too many people would be laid off. This opposition put 18 per cent of HP's shares firmly on the "no" side. The resulting fight between HP chairman and CEO Carly Fiorina and Hewlett, son of the company's founder, got nasty and personal.

Hewlett hired proxy solicitation firm MacKenzie Partners Inc. in November, hard on the heels of which followed Hewlett-Packard's hiring of Innisfree Inc. M&A. In December, Hewlett launched his opening salvo when he filed papers with the U.S. Securities and Exchange Commission that described the poor performance of the two companies since the merger was announced. In fact, HP's price had dropped 5.3 per cent and Compaq's share price had declined 17.8 per cent in the three months since the proposed merger was announced.

In January, HP filed a letter with the Securities and Exchange Commission that read in part, "Quite frankly Walter, you have never offered an alternative strategy that we all haven't debated and rejected." In a January 18 letter to shareholders, HP attacked Hewlett's credibility when it portrayed him as "a musician and academic who oversees the Hewlett family trust and foundation...Walter has never worked at the company or been involved in its management." On February 5, Hewlett, Edwin E. van Bronkhorst and the William R. Hewlett Revocable Trust filed a definitive proxy statement with the commission in opposition to the proposed merger.

As part of the communications strategy, both factions in the HP fight had "war rooms" led by the head of their legal teams. Both set up Web sites to get their messages across: www.votenoonhpcompaq.com and www.votethehpway.com. They also ran full-page ads in major newspapers at a cost of tens of millions of dollars. On February 27, Hewlett-Packard's Fiorina held a live audio Web cast of its meeting with security analysts in New York. During the meeting, Fiorina claimed that Hewlett's alternate strategy was "not a plan-it is a press release." In the final week before the vote, Hewlett appeared on CNBC's "Squawk Box" to argue against the acquisition.

The Hewlett-Packard/Compaq shareholder vote took place near the end of March, with a narrow margin of 2.8 per cent of shareholders voting in favour of the merger. In a scene reminiscent of the Bush/Gore election, the recount of shares took weeks to complete. Fiorina described the margin of votes as "slim but sufficient." Compaq's vote was more decisive-shareholders approved the merger by a nine-to-one margin.

It's been estimated that the tally of the proxy battle to HP was US$150 million. Hewlett reportedly spent US$32 million. And after the vote the huge amounts of money that were thrown into this fight continued to be spent. At the end of March, Walter Hewlett launched a lawsuit against HP-ultimately unsuccessful-alleging that HP's 11th largest investor, Deutsche Bank Asset Management, originally opposed the merger, but put some of its shares in favour of it after last-minute lobbying by HP. In his filing, Hewlett said that HP "obtained a significant number of votes by improper means and engaged in a series of deceptions related to HP's so-called integration plan." He added that "HP's clandestine use of corporate assets to induce or coerce votes in favor of the proposed merger tainted more than enough votes to swing the election." Hewlett also alleged that HP did not disclose additional financial information to investors that showed an unfavourable view of the integration. In turn, HP accused Hewlett of betraying the board and declined to re-nominate him to its board of directors.

In the midst of this acrimonious battle, proxy advisory firm Institutional Shareholder Services (ISS) played a key role. ISS, which keeps tabs on approximately 20,000 firms around the world, advises more than seven hundred pension and mutual fund clients on matters of corporate governance, including advice on how to vote in proxy fights. Just two weeks before the HP/Compaq shareholder votes, ISS gave clients a 26-page report that outlined the pros and cons of the merger. It advised them to side with management.

Patrick McGurn, vice-president of ISS, says "we viewed the strategy that was set forth by the boards of HP and Compaq as being one that was going to create more shareholder value over the long run than any of the other alternatives that were proposed, not only the ones that Walter and his people suggested but those that we heard from analysts and others. I think a lot of investors were putting a high-risk premium on this deal and figuring that they'd be best to almost literally shutter everything else and go with the imaging and printing business on a stand-alone basis and we felt that doing so was going to destroy value over the long run because you were going to have to close down virtually every other unit of HP over time but weren't going to survive on a stand-alone basis. So at the end of the day the idea that the combination was going to create a stronger overall business was a compelling one from our standpoint."

McGurn describes his company's role as unique. "We represent so many shareholders that we tend to get a pretty generous degree of access to both sides in these debates." Given the high level of access and the amount of analysis done, McGurn says ISS "can take the best information from all sources and then kind of sort it out on our own."

One reason that the HP fight was so bitter was because the key players knew each other personally. Says McGurn, "I think this fight generated probably more emotion than a lot of them typically do simply because these weren't strangers and everybody did know everybody else."

Some Good Name-calling
Although Canada hasn't yet seen any proxy battles on the scale of the HP fight, there have been a few rancorous spats. In May 2001, after a bitter five-week fight, a group of dissident shareholders replaced the board of directors of Fishery Products International (FPI) in St. John's, Newfoundland. The dissidents were led by John Risley, president of Clearwater Fine Foods Inc., a major FPI competitor, and businessman Derrick Rowe. Risley had attempted a hostile takeover in 1999, which was unsuccessful due to a provincial law that prevents a shareholder or alliance of shareholders from owning more than 15 per cent of FPI.

Pledging that all of the Newfoundland operations would stay open, Risley became CEO of the company and Rowe became chairman, after telling shareholders that the company needed new money and new blood, and that fears of job losses were groundless. Then in September, Risley attempted to merge the two companies in a deal that would have cut hundreds of jobs at three fish plants on the south coast of Newfoundland. FPI, which employs 3,500 people in rural Newfoundland and buys from three thousand independent fishermen, is an economic mainstay of the province. Small wonder a threat to its existence drew the ire of so many.

In February, the FPI/Clearwater merger was called off. The seafood company ended up paying $9.35 million on the proxy battle and severance payments for senior managers. The final tab for the attempted acquisition of Clearwater came to $1.9 million. FPI's total loss for the year was $1 million.

Fairvest Proxy Monitor in Canada, which is owned by Institutional Shareholder Services, had been called on to evaluate the FPI situation for its clients. Fairvest president Bill Mackenzie describes the process his company took in deciding how to create an informed recommendation for clients, including the evaluation of both boards and their platforms. He says "it looked to us like there was more on the agenda than just putting in new governance at FPI, which now having seen what's transpired since then it would seem yes, there's more to it than what was disclosed at the time. We had a really tough time figuring it out and I think everybody did. It was not an easy decision, because clearly the incumbent management had not provided good long-term growth for shareholders."

Mackenzie adds, "The boards of directors in both cases included decent, quality directors with some expertise, so we couldn't peg them on that. The issue that troubled us the most in our analysis was the past takeover activities that involved Risley and other related shareholders who were now substantial holders of FPI. It just seemed like there was something not right about it, so we ended up siding with management in our report. And as we became more involved in the debate, which got hotter, we got less comfortable with that decision. Our clients were becoming less comfortable with the tactics that the incumbents were using to ward off the challenge. It got kind of dirty, there was some good name-calling. In the end we were not as positively entrenched in the management camp as we had at the onset. But that being said, we didn't officially change our recommendation but we did help some shareholders with input during the final moments. I think in the end a lot of the swing vote probably went to support the people who had their money on the table and Risley certainly did have a big piece of equity. I think that was probably the sway in the end, to go where the money is."

Lawyers' Leadership
Lawyers usually play a leadership role during a proxy battle. Dale Lastman advises lawyers to set the agenda, the focus and the priorities. "If you don't keep everybody on a plan, the directors get nervous, the CEO of the company makes mistakes, and they forget what they're trying to do. The lawyer keeps everybody focused. It's easy to go for short-term gratification. It's nice to throw a salvo back that gets picked up in the media. It does you very little good lots of times, therefore there's no advantage to doing it and you feel good for 10 minutes and now what. You've got to keep your focus and keep the client's focus and focus on achieving what you set out to achieve, which is maximizing value for your shareholders."

"There are so many strategic decisions that are like a political campaign," says Kip Daechsel of Heenan Blaikie LLP. He and associate Wendy Berman, along with Joseph Groia and Alistair Crawley of Groia & Company, acted for Alex Dolgonos, founder of Unique Broadband Systems, Inc. (UBS), in the fight against the company's board of directors over control of the company. The conflict became personal-Berman describes it as a case of the two sides not speaking the same language.

With approximately 48,000 retail shareholders, the UBS battle was difficult for the management slate of directors and the dissident slate in terms of soliciting proxies. "Often you can retain the broker to solicit, but in cases like this where most of the shareholders are through discount brokerages, the broker doesn't want to solicit because she doesn't want to fall into the role of advising," says Berman. "So you look to other ways of communicating. One of the main ways was through the Web and through chat lines."

The battle for control lasted months, culminating in the election of Dolgonos's slate by 98 per cent of the vote at a lively March meeting. "There was heckling," says Berman. "You could see that there were two factions...it was not a staid or stuffy meeting.

"Most people don't want to be involved in a fight," adds Berman, describing the effort that went into finding a new slate of directors for the company. "The Canadian business community is not used to fighting. This kind of proxy battle goes on all the time in the U.S., but we're a bit more British. I think we'll see it more and more often but if you look at proxy fights, we don't have the same wealth of history the U.S. has. So when you're trying to recruit people to stand for election on a dissident slate, the usual response is 'it's a bit messy for me.' Somehow in Canada we don't want messes and so the fact that we were able to recruit these people despite the mess, and that these people hung on throughout the litigation battle, I think is a testament to the value of UBS and the value that Alex brings to UBS, because people were prepared to stand by.

"It's a fun roller coaster ride, but at the end of the day it's also very draining, because a lot comes at you," says Berman. "You start down a path and something else happens, you have to react or be proactive to prevent something from happening. It's like a political campaign or war, where you're trying to figure out where the other side is going."

Dirtier and Messier
McGurn at ISS predicts bigger and nastier proxy battles to come. "Every fight to end all fights seems to have gotten dirtier and messier. People ask if we've reached the high-water mark for this and I say probably not. Each successive fight seems to be a little more expensive, a little more heated, a little more in the mould of political campaigns in the U.S., where you've got negative ads and opposition research, personal attacks. Regardless of how much people say they're going to take the high road, it's inevitable that these things always end up in the gutter." He feels it's understandable in a way, since "the stakes are so high that people pull out all the stops, especially when they think they're going to prevail." McGurn says the actual number of contests that have come to votes and meetings has remained relatively static for the last couple of years, but the number that have settled or been threatened continues to rise yearly. "Quite often the sabre-rattling is enough to force companies into making some sort of change."

McGurn has noticed that consultants in political campaigns have started to become involved in proxy battles. "People tend to react to the negative advertising and the things that go on in political campaigns, so it's not surprising to see more and more of it showing up in the corporate election scene. Literally, these things are starting to look identical to political campaigns."

Koven's advice for dissident shareholders? "In for a penny, in for a pound. Don't think you can do it on a shoestring-if you're going to take on a company, you have to go all the way. Determine up front your tolerance for financial losses because if you say you're going to launch a cheap battle, you're almost sure to lose. You've got to be prepared to do battle right to the very end."


Ann Macaulay is a Lexpert staff writer.