U.S. activists eye Canadian proxy battles

TORONTO Fri Jan 20, 2012 12:22pm EST

TORONTO (Reuters) - More U.S. investors are targeting Canadian companies for proxy battles to boost the value of their stakes, encouraged by favorable laws and activist attacks on such blue chips as Canadian Pacific Railway (CP.TO) and Research In Motion.

Brad Allen, senior vice-president at Laurel Hill Advisory Group, said the attack on CP and shareholder restiveness at BlackBerry maker Research in Motion show that shareholders are more willing to take on larger Canadian companies.

Activist shareholders from hedge funds to private equity funds use proxy battles to shake up boards and revamp strategy at companies they see as undervalued and poorly managed. The tactic of voting out existing board members is especially popular in times of sustained market turmoil as shareholders seek to extract value from bleeding stock portfolios.

"More prominent firms are getting involved in these situations and there is no better example of that currently than CP and what's been going on recently as far as rumor mills are concerned at RIM," said Allen, whose firm is one of Canada's leading proxy solicitation companies, which help run campaigns to solicit shareholders' votes for or against corporate boards.

U.S. funds are no strangers to the Canadian market, but they have ventured north with increased frequency since the global financial crisis of 2008-2009. They are also starting to target companies far larger than those with market capitalizations of C$25 million to C$500 million, their traditional target range.

"With CP and RIM sort of bubbling at the same time, it definitely has and will raise the bar to show that nobody is immune to these things," said Allen.

Canadian Pacific Railway, which helped connect Canada from coast to coast more than a century ago, is the target of a proxy fight by William Ackman's Pershing Square Capital Management, a New York hedge fund that wants to replace some of its board and oust its chief executive.

Pershing wants CP to boost productivity, complaining that it lags far behind that of chief rival Canadian National Railway (CNR.TO), the nation's top rail provider.

Activist shareholders at RIM, including U.S. investors, are calling for a board shakeup and eventual sale of the company. So far, the dissidents say they are willing to work with the current board and management, but that could change if RIM's performance continues to lag.

RIM's market value plunged more than 70 percent in the past year after disappointing quarterly results, delayed product launches, weak sales of the PlayBook tablet and other missteps.

Other U.S. hedge funds active in Canada include such well-known names as Crescendo Partners, Greenlight Capital, Passport Capital and Palo Alto Investors. One of the most prominent is Carl Icahn's Icahn Partners LP, which launched a failed bid and proxy battle against Lions Gate Entertainment

(LGF.N).

U.S. funds like Canada because it is easier to force the hand of boards.

In Canada, Allen said, "there's no 'just say no.' If you have the requisite number of shares, you can requisition a shareholders' meeting and the company has a very limited amount of time and options to ignore that," said Allen. "In the U.S., there are a lot more defenses available."

One major disadvantage in the United States is that only a percentage of a company board comes up for reelection each year, whereas in Canada entire slates are approved annually.

"In the U.S., predominantly, it's only a percentage of the board that ever comes up for rotation, so if you want to replace an entire board, it's a long-haul process," said Allen.

To be sure, recent data suggests Canadian boards are increasingly prepared to deal with shareholder activists.

In 2009 and 2010 management was on average losing 60 percent of all proxy fights. Last year, they turned that around, winning more fights than they lost, according to data on Sedar, the Canadian document-filing system for companies.

Allen forecast a tough fight for Pershing if the firm gets into a full-fledged proxy battle with CP, predicting a partial victory at best.

"I think he (Ackman) has an uphill battle," said Allen. "What he wants currently may end up being sawed off and everyone walks away with a partial victory. ... A lot of these things go that way."

(Reporting By Pav Jordan; Editing by Frank McGurty)

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