When you own shares in a company, and you don’t like what’s going on at the company or the board, your easiest option is to sell your shares and move on. “Vote with your feet,” as we like to say on Bay Street.
But, what if you are a big shareholder, and think you can do better at running the company than the current management team? Well, then it is time to start a proxy fight, to try to make changes to the company, add new board members, or even take over the entire board.
This year, we’ve seen an increase in these very-public board battles. Some are civil, most are ugly. At the minimum, they cause a lot of confusion for investors, as each side tends to put out well-written press releases explaining why they are great and the opposing parties are idiots. So, investors need to choose between two genius boards, or two idiot boards, depending on how you interpret these releases.
Let’s look at five recent and current board fights:
Knight Therapeutics (GUD on TSX)
Knight’s 7.3 per cent shareholder and board member Meir Jakobsohn supported the company for many years. And why not? The company was run by seasoned health care veteran Jonathan Goodman, who has had great success with other companies, particularly Paladin Labs, which was sold for more than $3 billion. Knight also had more than $700 million in cash to look for biotech deals and royalty streams. But, like most shareholders, Jakobsohn got bored with the ‘lack of action’ at Knight. The market dipped, and still no big deals were made when valuations on possible acquisitions improved. Years went by, and still no big deals were made. The market soared, leaving Knight investors well behind what they ‘could have made’ elsewhere. To make matters worse (for shareholders), Knight pays no dividend, and shares are down 9 per cent in the past year. Jakobsohn had enough. He launched a proxy fight in March, with the shareholder vote in the first week of May. Founder Goodman says he will step down if his slate loses, though Jakobsohn has denied his goal was to remove the founder and take over the company.
HIVE Technologies (HIVE on TSX-V)
HIVE, a former high-flying crypto currency miner, is the most recent fight on this list, with news just hitting this week that Genesis Mining, which owns 25.6 per cent of the company, sent notice to HIVE in early April alleging “material breaches” in an agreement between the two companies. Genesis representatives on HIVE’s board also tried to remove Frank Holmes as interim chairman and CEO, but failed. Genesis is now seeking to elect a new slate of board members, the majority of which would be Genesis representatives. Genesis has also formed a committee to act in the best interests of all HIVE shareholders. Already ugly, Genesis has said HIVE’s management “isn’t competent.”
Methanex Inc. (MX on TSX)
M&G Investments, owning 16.5 per cent of Methanex, sent a letter to the board on March 28, essentially saying the company was taking on too much risk if it proceeded with its Geismar 3 methanol plant without a partner. Methanol prices are highly volatile, so M&G wanted a more conservative approach to new growth. This fight didn’t last long. On April 12 an agreement was reached, with MX agreeing to recommend a new director suggested by M&G and to add another director in the future from an M&G suggested list. In return, M&G has now agreed to vote in favour of the company nominees, essentially ending the fight completely. MX meanwhile missed earnings estimates this week, but did raise its dividend by 9 per cent. Shares are up 18 per cent this year.
Bed Bath & Beyond (BBBY on NASDAQ)
Bed Bath & Beyond has been facing pressure from activist investors Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors. All in, the investors own about a five per cent stake in the company. The activist investors criticized the board for not holding itself and the company’s management accountable for poor performances. The investors also criticized the board “for the magnitude of value destruction in the last five years.” The pressure has already resulted in the co-founders stepping down from the board. Still, the investor group remains unhappy, and has proposed its own slate of directors up for election at the June 29 annual meeting. Expect more fireworks between now and then. Shares are up 49 per cent this year as investors like the activists’ pressure on the company. Long-term holders need some improvement, certainly: shares are less than one-quarter of the value they were in 2014.
Hudbay Minerals Inc. (HBM on TSX)
Waterton Global Resource Management, whose funds own 12.1 per cent of the company, launched a fight in February, which started ugly. “Hudbay’s current leadership team has proven unable to effectively run a global mining company,” one of Waterton’s earlier press release stated, “resulting in abysmal” returns. Waterton wants to replace the CEO and put in place an independent board to help close HBM’s valuation gap with its peers. Meanwhile, HBM’s largest shareholder, Letko, Brosseau & Associates, with 13.4 per cent, has publicly stated it will support the current board. The battle goes to a vote on May 3. Hudbay shares are up 43 per cent this year with all the excitement, but are up a much-more-muted one per cent in the past 52 weeks. Shares are only about one-third of the price they were at in 2007.
Peter Hodson, CFA, isFounder and Head of Researchof 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).