* Global market slump brings wave of activism to Canada
* Agitation could escalate into full-scale proxy fights
* Corporate governance reform has fueled trend
* Arrival of U.S. hedge funds in Canada has contributed
* More proxy advisory firms are operating in Canada
By Pav Jordan
TORONTO, Nov 20 (Reuters) - Underperforming Canadian companies should brace for a wave of shareholder activism as investors try to wring value from portfolios that have been battered in a global market slump.
In the last few weeks alone, three top companies - BlackBerry maker Research In Motion , grain handler Viterra Inc and Canadian Pacific Railway - have faced highly public investor agitation, once a rarity in Canada.
In all three cases investors are unhappy with management strategies to reverse falling stock prices.
When management doesn't respond, a full-scale proxy battle can ensue, as activists resort to shareholder votes to force management to boost dividends, change strategy or even to scupper an unwanted takeover. For the agitators, a successful fight often results in installing their own supporters on the board of directors.
"What's happening is that funds, most of whom have never thought of being activist investors, are looking at their screens and seeing a lot of red," said Walied Soliman, a partner at the Norton Rose Group and one of Canada's leading proxy battle veterans at the tender age of 34.
"Investors are saying, 'Some of this red, we can't control,' but they are also looking at some deeper reds and saying, 'Why is this such a deep red? I know everyone is underperforming because of the markets but these guys are performing well below the market'," he said.
Proxy battles have also emerged as a useful technique to court shareholders in hostile takeover situations.
A recent example is Wi-Lan's unsuccessful bid for Mosaid Technologies , defeated by a white knight bid from Sterling Partners.
The London Stock Exchange's failed in its attempt to take over TMX Group , Canada's largest stock market operator, after a rival bidder persuaded enough shareholders to vote against the transatlantic deal.
Proxy fights gathered momentum in Canada over the past decade in part because corporate governance reforms have made it easier to influence boards.
In keeping with the trend, the number of proxy advisory firms, which help activists garner support from major shareholders, has risen from one to four since 2003.
"It's like an election campaign," said Brad Allen, the senior vice-president at Laurel Hill Advisory Group. "Working for our candidate, we help refine the message, identify the constituency, reach out to determine sentiment, and develop dynamic polling results so our client knows in advance where they will likely end up at any point in time."
As global markets weaken, shareholder activism is picking up steam in Canada after a slowdown. Experts predict 2012 might even mirror 2009, when a global liquidity crunch led to 40 Canadian proxy contests, the most in a decade.
"There's an inverse correlation between stock performance and proxy contest activity," said Allen. "As a result of the mixed market currently we're seeing an increase in both proxy contests and unsolicited offers."
U.S HEDGE FUNDS
Viterra, Canada's largest grain holder, announced plans this month to replace two of its board members after its top shareholder, the Alberta Investment Management Corp, called for a shakeup.
RIM, once a market darling, is under attack from a group of investors led by Jaguar Financial , which says it is leading a movement by shareholders representing more than 8 percent of RIM stock.
Jaguar is demanding sweeping change at the BlackBerry maker, or a sale of RIM as a whole or in parts.
Daniel Batista, a partner with the Fasken Martineau law firm in Toronto, attributes some of the growing appetite for shareholder activism in Canada to more investment by U.S. hedge funds with long experience in using activism as a tool to boost returns.
"I really do believe that a big part of it has been that the U.S. hedge funds have begun to come north of the border and do business here, and they've brought their attitude and style," said Batista.
Last month Pershing Square Capital Management said it had acquired a 12.2 percent stake on Canadian Pacific, Canada's No. 2 railway, which had previously announced falling profits and productivity.
Other prominent U.S. hedge funds that have been involved in proxy fights in Canada are Greenlight Capital, Passport Capital, Palo Alto Investors and Icahn Partners LP, which launched a failed bid and proxy battle against Lions Gate Entertainment .
Canada has had some 20 proxy fights so far this year, and that excludes activist movements that were resolved without a fight, according to data from several proxy advisory firms. That roughly matches the 2010 number.
Wes Hall, president and founder of Kingsdale Shareholder Services, expects the trend to keep gathering pace as investors tire of watching companies sit on cash hoarded over the recession.
"Shareholders look at that and say, either do a dividend or do something, an acquisition or something, otherwise I'm going to take charge of the board and I am going to do something with that money," said Hall.