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Proxy Battles in Canada

Can shareholder activists be long-term thinkers?

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80729629Corporate law does not seek to silence shareholders. On the contrary, it contains rules that allow them to communicate with each other and, if they disagree with the decisions of the board, to participate in the governance of the corporation by nominating and electing directors. These proxy rules are part of a broader statutory framework that also allows shareholders to make written proposals for consideration by the corporation, requisition meetings if they hold a certain minimum percentage of votes and bring actions for conduct that is oppressive or unfairly prejudicial to their interests. With this panoply of provisions, corporate law ensures that shareholders serve as a check on the decisions of the board.

A “proxy contest” or “proxy fight” is a battle between management and the shareholder(s) regarding which directors should be nominated to the board. Actions taken by major shareholders, including hedge funds, in proxy contests have generally been outside the realm of academic research in Canada. The lack of academic attention to this activity – often referred to as “shareholder activism” – is striking given that there were over one hundred proxy battles in Canada between 2008 and 2012, representing an 84 percent increase from the previous five-year period.

This article seeks to motivate the academic debate by addressing the claim that activist shareholders are concerned only with the short-term as opposed to the long-term interests of the corporation. The article argues that looking out for the short-term is not necessarily inconsistent with doing the same in the long-term, especially when inefficient leadership is at the helm of the corporation.

The debate about short-termism has arisen in the context of whether dissident shareholders should be permitted to offer compensation to their board nominees, over and above the compensation that the nominee would receive if elected to the board. This article contends that major shareholders, including hedge funds, should indeed be permitted to offer extra compensation to board nominees as long as the details of this compensation are disclosed.  Once elected to the board, dissident nominees, like all directors, are legally bound to act in the best interests of the corporation, regardless of who nominates them and how they are compensated. These directors face conflicts, no doubt, but are legally obliged to adhere to their statutory duty nonetheless.

In Part 2, this article examines the empirical literature regarding shareholder activism, suggesting that the empirical evidence is not definitive on the benefits of shareholder activism to the target corporation. Therefore, our thinking about proxy contests cannot begin and end with the statistical studies; deeper analysis is required.  Part 3 then analyzes the issue of short- versus long-term value, and on the basis of recent proxy contests, argues that the two are not necessarily inconsistent. Part 4 analyzes two important issues that have arisen in recent proxy contests. Part 5 concludes. Download the full paper.

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