Episode 5: Proxy fights

Disputed - Discussions to keep your business risk-ready

November 17, 2021
Disputed podcasts


Battle for the Board: proxy fights happen when shareholders rally to gain control of the company and its future. Even with the impact of COVID-19 on capital market activity, shareholder activism in the form of proxy battles is rising. Does that mean it’s getting easier to start a proxy fight? What factors are driving these battles? Join hosts Ailsa Bloomer and Andrew McCoomb as they ask Walied Soliman and Orestes Pasparakis, co-chairs of the firm’s Special situations team, why Canada is experiencing more proxy fights, what tactics are deployed, and how companies can fight back. Walied is the chair of Norton Rose Fulbright Canada and chaired the Ontario Capital Markets Modernization Task Force. Orestes has been called the “go-to lawyer on any bet-the-company litigation file”, and together they have won some of Canada’s most complex corporate disputes.  

This episode qualifies for 20 minutes of CPD credit in Ontario and 30 minutes in British Columbia. 



Proxy fights | EP 5



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Ailsa Bloomer  00:11
Hello and welcome to Disputed, a Norton Rose Fulbright Podcast that looks at the trends, issues and opportunities across Canada’s legal landscape. We’re your hosts, Ailsa Bloomer and Andrew McCoomb, and in this episode we are talking about proxy fights. This is where shareholders rally to get enough votes to overthrow the board, or make other changes at a company.

Andrew McCoomb  00:34
Even with the impact of COVID on capital market activity, shareholder activism in the form of proxy battles is rising. 2021 saw the biggest proxy fight in history (based on market cap) when in the U.S. Engine No. 1, which owned less than 0.1% shares in ExxonMobil, won its battle to change Exxon’s Board composition, and influence its strategy on climate change. But what’s happening in Canada? Is it getting easier to start a proxy fight? What factors are driving these battles? And what tactics are used and how can companies fight back?

Ailsa Bloomer  01:07
Well to rescue us from this theoretical minefield, we were very lucky to speak with Walied Soliman and Orestes Pasparakis. Andrew, a lot of people that work in this field will know or have come across these two, but since they are in your team why don’t you give our listeners an overview of who they are and why they’re the knights that you want in your corner when facing, or bringing, a proxy battle.

Andrew McCoomb  01:29
Walied is the chair of Norton Rose Fulbright here in Canada, and he’s been involved in some of the most significant complex M&A transaction and proxy battles in the country. He works with buyers, sellers, boards, hostile bidders and shareholder activists and last year he was mandated by the Government of Ontario to chair the Capital Markets Modernization Task Force. Orestes is the “go-to lawyer on any bet-the-company litigation file” (that’s a direct quote from Chambers & Partners). He’s also won some of Canada’s most contentious and complex corporate disputes, often with an international dimension and he’s acted in over 40 high stakes proxy battles.

Ailsa Bloomer  02:08
Walied and Orestes also founded and co-chair Norton Rose Fulbright’s Canadian Special Situations team, which is your team in Toronto, Andrew?

Andrew McCoomb  02:17
That’s right, they built it and it really is the leading Special Situations practice in Canada, assisting clients with hostile M&A and related litigation, shareholder activism, complex reorganization transactions and a lot more. And Walied and Orestes have made major contributions to this area of law in Canada – you’ll hear them talk about, for example, the “Advance Notice Bylaw”. So, you know, if you want to talk to people that are in the trenches and on the battlefield in this space, it really doesn’t get much better than this. So, without further ado, here’s our conversation with Walied and Orestes talking us through what a proxy fight is, why Canada is a fertile battleground, what tactics are used and what weapons an issuer has to fight back. 

Walied, Orestes, welcome to Disputed. Thank you guys so much for joining us. Let's start this conversation off by talking about the Special Situations team. Maybe you can tell our listeners a bit about the team and what we do.

Walied Soliman  03:20
Orestes and I, one of the biggest blessings and privileges certainly in my career, I hope he feels the same way, we started working together about 15 years ago. And you know, we've built the leading special situations practice in Canada. We basically deal with, you know, the most complex situations in M&A, proxy battles, boardroom disputes, you know, unique litigation disputes, and they all have one commonality and that commonality is a lot of hair, a lot of difficulty and a need for some really creative out of the box thinking. There's a great saying in hockey, Andrew, that your forwards seem to play a lot better when they got an incredible goalie. And Orestes is, I think the leading litigator of his generation in this country. And boy, he stopped a lot of pucks that, when we had too many guys too close to the blue line on the other side, that should have gone into any other net. And that's what's-- that's what made this partnership and this group, just fabulous.

Orestes Pasparakis  04:20
And it's a really fun practice because you're dealing with that real-time, complicated bet-the-farm issues that have a corporate element, a securities element, and a litigation element, and you need to understand business, you need to understand securities law, and you need to understand leverage and litigation dynamic. And so when we embarked upon this as a partnership, a true partnership between somebody who had the corporate and securities experience and somebody who understood the litigation we were at, we were able to add tremendous value. And we were able to run circles around firms that either treated this as a corporate issue, or a litigation issue.

Ailsa Bloomer  05:04
Okay, so this episode is about proxy battles, specifically, so a specific type of special situation. Let's break it down. What is a proxy battle?

Orestes Pasparakis  05:13
It's a fight for control of the company. It is, at its most basic level, an election in which shareholders decide by granting proxies either to the management team, or to what is called the dissident. And whoever has the most proxies should win. And so it's a fight for proxies, it's a fight for votes. But really, it's a fight for the future and the control of a company.

Andrew McCoomb  05:41
Tell us a bit about Canada as a jurisdiction for proxy fights, is the legal framework in Canada more favorable to either issuers or shareholders and why?

Walied Soliman  05:50
So Canada has the most shareholder activist friendly jurisdiction in the entire Western world. The reasons for that are numerous. But as a matter of public policy, the arc is really generally actually stacked against boards. That's where we come into play, we really enjoy defending boards in these really difficult situations. Or, and we do it just as often, acting for activists or longtime shareholders who are not activists who are having a really rough time to take advantage of the unique capabilities available in the system, that’ll ensure that they're able to meet their corporate objectives.

Orestes Pasparakis  06:29
And those benefits include an ability for shareholders to requisition a meeting or demand that a meeting be called to deal with the agenda that they have set, if they can collect together 5% of the issued and outstanding shares. So if you've got 5% of the shares or support from 5% of the shareholders, you can require the company to hold a meeting to deal with business as-- as you see fit. And so that's really the-- the low bar to entry that we have in Canada.

Ailsa Bloomer  07:04
Okay, so it sounds like Canada is a jurisdiction then where it seems to be more friendly to shareholders, it's easier for them to requisition meetings. Walied, you mentioned activist shareholders -who are these activists, are they individuals, are they sophisticated investors?

Walied Soliman  07:19
First of all, there's a class of investors who raise money to identify activist situations, and to go after companies in a wide array of areas. Simply using the regulatory framework that we have here in Canada, and raising money for the specific purpose of activism. We've acted for some of the leading ones in the country and in the world, here in Canada. Other activists are sort of activists by accident. They've been longtime shareholders, they've never done an activist campaign in their entire careers, they're long funds that are focused on—on-- on just a good return. But they're frustrated, they're frustrated with an entrenched management team. They're frustrated with poor performance, and they call Orestes and I, and they say, what solutions do we have? And when we start talking to them, about what's available to them in Canada, they're usually pretty surprised, aren't they Orestes?

Orestes Pasparakis  08:14
Yeah, absolutely. There's also a third kind of activist, and that's an activist, that is activism that's driven by an inflection point in the company. And what Walied and I have seen many times is where companies are given a decision, you know, should we go down this strategic path? Or should we go down that strategic path? And management decides to take a specific sort of path, and a shareholders often put their hand up and say, wait a second, I didn't sign on for this, this is not value maximizing. And that drives activism. And we see that, you know, in connection with acquisitions, in connection with divestitures, in connection with board hires, or deployment of capital, so all of those inflection points can give rise to activism.

Andrew McCoomb  09:01
Orestes, you pointed to shareholder requisitions as being a key tool for activist? What weapons does an issuer have to fight back?

Orestes Pasparakis  09:09
I think there are three key weapons that an issuer has, the first thing that we introduced into Canada, probably now 10 years ago, was the Advance Notice By-law. And that is a requirement that, in a sense flushes activists out early, before an annual meeting. It allows the company to know whether they're in for a fight and give them enough time to prepare. And so I think that's sort of a key tool in the toolbox. And I know Walied's gonna know the stats better than me, but I would be surprised if it's not less than 90% of TSX issuers today have an Advance Notice By-law. The second thing that an incumbent board can do is it can set the date of the meeting. And it can set the date of the meeting quickly, in circumstances where it thinks it has an advantage, or it can use more time in circumstances where it believes in its bonafide best interests there are reasons for a longer meeting date. And so by controlling the meeting date, they control the agenda a little bit. The third, I think, important feature or tool that's in management's toolbox is that management is able to move and adapt to address the concerns of an activist. You imagine, in circumstances where an activist's key agenda is to do a certain thing, to divest an asset or to change management. If the board decides proactively, that it's going to divest that asset, it takes the wind out of the sails of the activist, and we've seen that successfully work many, many times. Walied, did you want to add anything?

Walied Soliman  10:51
Yeah, no, I think those are great things. But I'll tell you the most important way for a company to defend itself – performance. And, you know, there's no substitute for that, we always like to tell our clients that we're defending that there's a variety of legal mechanisms that are available to us and that are available to an issuer. Look at, one of them is, you know, how a proxy solicitation is being conducted by the other side. Another one is, you know, how the issuer is dealing with other shareholders, are their joint actors. There's a lot of very credible claims that an issuer work very closely with Orestes and I on, in order to ensure that a meeting is held in as fair a manner as possible. But bottom line is, shareholders are looking for returns, they don't do activism campaigns for fun. And if there is a better investment thesis for the company presented by somebody else, in an environment where shareholder activism has a clear route to success, there's a big chance you're gonna lose.

Ailsa Bloomer  11:54
I think that touches on an interesting point, which is the types of challenges that activists are bringing. So it sounds like from what you're saying Walied, its profit maximization focus still. We are seeing the rise of ESG activism, and I'm thinking particularly of the Engine Number 1 ExxonMobil proxy battle that happened earlier this year, are you seeing a change in the nature of factors that are influencing these proxy fights?

Walied Soliman  12:19
Listen, the number one reason for a proxy fight continues to be value maximization. Most of the folks involved in this area are going to spend the money on Norton Rose to either, you know, to launch a fight for them. They have an investment thesis that includes a great return. By the way, even with those investors who engaged in ESG activism, it has been part of an investment thesis that gives them a big return. So look, we see all sorts of reasons for proxy fights, we talk often, Orestes and I, about emotive-- emotive reasons that are sort of advanced in the-- in the public narrative. And the real reasons that things are being advanced in the public narrative. Regardless, there's a number of ways for folks to go about this. But the profit motive continues to be pretty primary.

Orestes Pasparakis  13:16
And that's because the cost of a proxy fight to a dissonant is going to be measured in the millions of dollars. It'll be measured in the millions of dollars for management. And depending on the size of the company, it could be measured in the many, many millions of dollars. So there is necessarily, a financial driver to a proxy battle.

Andrew McCoomb  13:39
Yeah, I think that's an important strategic point to emphasize, when these fights get drawn out over many months, and they're in the media, and they're maybe in court, or the securities commissions, you've got legal fees, you've got litigation fees, you've got proxy solicitation, firm costs, trying to win hearts and minds out there in the shareholder base. Depending on how big the shareholder base that can mean contacting a lot of people. There's hard costs associated with that, with printing and mailing circulars, there's reputational costs, particularly if you know if the gloves are off. And I think in our research, we noted that the that Exxon Mobil Engine Number One battle, the costs were north of $30 million. So it really can add up for parties on both sides of these fights. This is maybe getting into a bit of the nuts and bolts here, but assuming a proxy fight is headed toward a contested meeting, can you guys take us through a bit of the process and the tactics heading into that meeting and what's happening?

Walied Soliman  14:37
First of all, requisitions are this remarkable tool in Canada that really don't have a precedent at least in in North America and most of the rest of the Western world. Requisition is sent to a company, the company has 21 days to call a meeting if that requisition is proper. The first thing that Orestes and I do in our team is we pour over the requisition to determine if it is a valid requisition. That's our first step. As we go through that process, if we've determined it's not valid, we engage in—in- in a dialogue either with the requisitioner or we simply throw it out. Meeting is called usually pretty close to the 21st day. Orestes and I have an ongoing argument as to how much time you have to call the meeting, the law in British Columbia seems to be four months, something in the four to five month range is great, although there's lots of precedent into-- into six months where the circumstances permit it (if our viewers could see it Orestes is smiling at me). But-- but six months, there's quite a bit that happens out there at six months as well. And then there's just a-- there's a bunch of legal back and forth that happens, Andrew, circulars, complaints to the OSC, do we throw around all sorts of lawsuits and stuff. But fundamentally, there is a political campaign for the hearts and minds of shareholders.

Ailsa Bloomer  16:05
So it sounds like controlling the narrative is one of the most important things that either side can do in a proxy battle. I mean, what types of tools available, does the board and a shareholder and activist have to control that narrative?

Orestes Pasparakis  16:20
Well there are tons of tools, there's everything from the circular, which is a regulatory document that you need to publish and send out to shareholders before you begin soliciting. But there are press releases, there are fight letters, we've seen town halls, we've seen calls to major shareholders, it is truly a campaign. In the same way that an election involves knocking on doors, a proxy battle involves knocking on doors, but it also involves all of these other means of communication of the ways of getting your message out. And companies and activists now routinely hire communications firms. They work with lawyers to make sure their messages are appropriate, given the legal requirements, but also that will speak to the issues that-- that are driving the proxy battle in the first place. So it's, you're right, it's all about communication. And the avenues of communication are many. And what we're seeing more and more, quite frankly, is the use of social media, is a use of websites. And that's now become everyday fare in proxy battles.

Andrew McCoomb  17:35
So you've got all those lines of communication being used, and it sounds like new ones opening up every day. And you got the temperature turned up in these fights between activists and issuers. How do you police that information to make sure shareholders are getting accurate information and make sure shareholders are getting fair information to make a decision?

Orestes Pasparakis  17:53
I think there are three ways to police it. The first is, you call it out. You call it out in response to something that's unfair or untrue, and you set the record straight in your own materials. Secondly, the regulator can get involved in circumstances where there are misrepresentations that are likely to mislead a shareholder and on the one hand, the regulator is loath to call balls and strikes in a proxy battle. On the other, you know, the ensuring that shareholders are not misled is an important policy function of the regulator. So there's a tension there but the regulator will take interest, the third avenue is-- is to go to court. The court has a supervisory role over meetings. And if somebody has unlawfully solicited a proxy, or made statements that are misleading or designed to mislead shareholders, you know, either side can go to the court for assistance. And because proxy battles are, you know, day-to-day, unregulated fights, so to speak, having the courts step in and provide some guidance is useful from time-to-time.

Andrew McCoomb  19:09
Okay, let's talk about the meeting itself. Tell us a bit of the mechanics and the tactics of a meeting and how the events of the meeting itself sort of play into the overall strategy in a proxy fight.

Walied Soliman  19:21
Well, by the time a meeting starts, the fight's already over. And, and we know the result, but I'm going to tell you, there's a very critical period of time, between the time the votes come in, and the start of that meeting. Canada is very unique. In Canada, the company gets to see both sides of the vote, and the dissident sees nothing. This is unique in the Western world. This is not how it works in other parts of the world. And it drives people who are used to sort of our parliamentary democratic system crazy, because how's this possible, but that's the reality. And therefore, there is an inherent advantage for the company in that one period between the date the votes are in and the start of that meeting. And there's an active campaign that goes on to try to switch your votes during that period. It's a very stressful period for issuers, particularly in a tight race.

Orestes Pasparakis  20:18
I can think of one of Canada's largest proxy battles ever, in which we switched a vote during that period that moved us from losing a proxy battle to winning a proxy battle. And that change, you know, was fundamental to the success of one of Canada's largest companies. So that's a real issue. And there's a reason why you see meetings always taking place on a Tuesday, because the period of time that you have to look at proxies is 48 business hours, and they do it on a Tuesday so you've got the whole weekend to look at the proxies and begin your solicitation to flip people as Walied has described.

Ailsa Bloomer  20:57
I think another trend that we are seeing with proxy battles is a lot of them don't end up making it to the meeting, they're settled before that, can you talk a bit about why that is happening and whether settlement is a win-win, perhaps?

Walied Soliman  21:10
No, I don't believe in that. Let me tell you this. This is very important. One of the scariest moments in a campaign for me is when I'm feeling confident and the other side is not settling down and they're continuing to fight. And the reason for that is that one of us is wrong. And it's sometimes very difficult to tell until that period from the proxy cut-off to the-- to the—to the date of that meeting. So there is a very careful, continual dance in order to make sure that the intelligence that you have in these fights is not off. And that you are in fact in a position where you either know you're winning or know you're losing. Settlements occur when both sides are feeling a little insecure. And it's the only time it happens. If one side is feeling like they're gonna win either side, no settlement happens. If you are reaching out to engage in settlement discussions when you're losing, you're dead in the water. If settlement is your objective, then Orestes and I work very, very hard to create the circumstances and the leverage in order for that discussion to happen. But settlement is a very delicate and complex component of these fights.

Andrew McCoomb  22:33
Guys, look I think we've barely scratched the surface on this, but I can tell from how much fun you're having that we may be able to convince you to do this again. Given the breadth of the special situations team, but also your respective practices, I’m sure there’s much more to talk about. So we will gladly have you back if you’ll join us. But for now, thank you guys so much for your time. 

Orestes Pasparakis  22:54
Thanks for having us.

Walied Soliman  22:55
Thanks for having us.

Ailsa Bloomer  22:59
We hope you enjoyed this episode of Disputed. If you'd like to find out more about this topic, or how to contact our guests, please visit nortonrosefulbright.com/disputed. Also, if you have any questions, feedback, or topics that you'd like us to cover in a future episode, please do email us at disputed@ nortonrosefulbright.com. And if you would like to hear more, please subscribe to Disputed on Apple Podcasts, Spotify or wherever you get your podcasts.

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