TORONTO (miningweekly.com) – On April 8, New York-based hedge fund Jana Partners expressed confidence that two of its five nominees would be voted onto the board of Canadian fertiliser producer Agrium at the company's annual general meeting the following day. The company is also a significant potash producer.

In the event, Agrium maintained control of all 12 board positions. “This vote shows overwhelming support for Agrium and its integrated strategy,” Agrium president and CEO Mike Wilson said at the time.

To say Jana was unhappy with the result would be an understatement. “This is the worst example of power-hungry, entrenched at-any-cost behaviour I have ever witnessed,” Jana managing partner Barry Rosenstein said.

In proxy battles, where the stakes are so high, little love is lost between the contending parties. 

Know Your Enemy

At its essence, a proxy battle is a contest to secure the hearts and minds of shareholders. An activist who secures shareholders' voting support can win influence or control over a company’s board.

During its proxy battle, Agrium took representation from Norton Rose’s Canadian special situations team, which includes co-chairs Walied Soliman and Orestes Pasparakis. In a joint interview with Mining Weekly Online, they explained why a mining company could find itself threatened and what the best defensive measures are. 

“If a company is lagging behind its peers, it becomes a target; if the company has multiple strategies and chooses one not preferred by most shareholders, it becomes a target; if the company has excess cash on the balance sheet, it becomes a target,” Pasparakis said.

“In the latter situation, we’re often talking about guys working to a thesis, wanting to come in at a certain price and then exit at a much higher level,” Soliman added.

“In these cases, it’s often a pure cash grab, simply because the company has more cash and properties than its market capitalisation,” Pasparakis said.

“And be in no doubt how well organised and prepared these activists are,” he added. “They use algorithms to constantly analyse TSX-listed companies, seeking out the best targets. They’ll look at a company’s cash position or whether the directors control a significant number of shares. They’ll also examine how long the directors have sat on the board and how a company’s shares are performing.”

Nepotism and cronyism, or its perception, is also a motivating force for activism. “Proxy fights can erupt when a management team seems to be taking too much money for itself or is treating the company like a piggy bank,” Pasparakis said.

“Generally, this occurs more often in smaller mining companies. Frequently, it involves someone who started the business, brought in money and then employed his wife, daughter, son-in-law, or whoever. Investors are fed up with this sort of behaviour,” he added.

“For bigger companies, we’ll look at the interconnections between board members. If the board has become more like a club – for example, board members are all close friends and take turns sharing various seats – it might open the company up to attacks as well,” he said.

“On other occasions, the CEO might be chronically underperforming, becoming a lightning rod for opposition. It’s then that we might recommend his or her removal. Putting in place a new CEO can often buy a company vital time as the galvanising event for hostility has been removed,” he added.

Know Your Shareholder

Mining companies seeking to bolster their defences against a proxy action should do so with care; sometimes the best form of corporate governance has the unintended effect of making the company more vulnerable.

“A company can adopt measures that are best-in-class for corporate governance, hoping to satisfy shareholders who are concerned with this. However, best-in-class measures can sometimes expose a company to a proxy battle,” Pasparakis said.

“For example, activists prefer the ability to vote for individual directors [often a best-in-class standard] rather than having to vote for the whole slate, [the entire board at once],” he said.

Concurrently, getting to know the shareholders is a fundamental method to ensure support and stability. “But when was the last time you met your shareholders? When did you last meet them face-to-face? When did you last bring them up to speed with the company’s progress or explain its future vision? Management needs to think about these questions,” he advised.

Often, the party with the best understanding of a company’s by-laws and its articles holds the critical advantage in a proxy battle. “Companies who are unprepared frequently don’t have advanced-notice [vote proposition] by-laws; don’t have an enhanced-notice quorum policy; and only have low quorum thresholds. Sometimes they have strange provisions relating to the powers of the chairperson. The list goes on,” Soliman said.

“A company that tightens up its by-laws and articles sends out a clear message: that it has thought about activism and has prepared its defences. Those looking for easy targets usually take note; it’s more likely they’ll move on to the next company on their list,” he added.

The experience level of a company board is another important consideration, Pasparakis pointed out. “We often see mining companies attacked because their boards don’t have specific skills represented. For example, they might lack someone with investment banking expertise … a company needs to be proactive and ensure its board has the right skills matrix; this makes it easier to defend against an activist’s claim that necessary talent is missing.

In the future, proxy battles in the mining sector will become more frequent but require greater precision. “It will become more complicated to run these battles; in the future, proxy contests will only succeed when a company is gravely dysfunctional or an activist presents a robust alternative for growth,” Soliman said. “However, there’s no question that proxy battles will become more prevalent.” 

“Certainly, we’re going to see a greater volume of proxy battles in the mining space and, with metal prices the way they are going and the knock-on effect of this, there will be lots more disgruntled shareholders and unit holders who’ll want to mix things up at the board level,” Pasparakis said.