Legal news and trends for Canadian in-house counsel and c-suite executives
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the value of their investments. They do so by attempting to put a company up for sale, encouraging a company to take on debt in a low-interest-rate environment in order to declare big stock dividends, or execute other recapitalization transactions, says Pressman. They may also simply take an opposing view to the business plan of the existing board, and seek to install those who represent their own views. While value maximizers are the typi- cal type of shareholder activists, Pressman believes it's important for in-house counsel to take a wider view of potential activists. He refers to another group as "corpo- rate governance watchdogs." This group will carefully examine how independent a board is and how executives are com- pensated. Examples include the Canadian Coalition for Good Governance, proxy advisory firms such as Institutional Shareholder Services Inc. and Glass Lewis & Co. "Although they may not be what I call classic activists, they inform the activ- ist environment," explains Pressman. Even media organizations that report on the business community and rank publicly traded companies based on factors such as their board composition, independence, and executive pay practices can be includ- ed in this group, he adds. "This all affects corporate reputation, and it affects, quite frankly, stock price performance," he says. "People have to be very mindful of corpo- rate governance activism." Pressman refers to his final category of shareholder activism as "corporate activism and activism as it affects matters related to social responsibility and responsible corpo- rate behaviour." Again, all of those aspects have a significant impact on a company's reputation. "There are shareholders who are very concerned with how companies conduct themselves internationally, how they respect the environment, how their boards and management teams are rep- resented as a matter of ethnic and gender diversity," he notes. "They vote at director elections, and they're articulate, and they have very legitimate interests." Meanwhile, Pressman says there are many players within corporations that have a role to play in managing the issues brought forth by these three types of activ- ists. But perhaps even more importantly, they must endeavour to anticipate the types of issues that might attract shareholder activism. Investor relations personnel are best positioned to be aware of market activity, as they have regular contact with financial analysts and are often on the road speaking with investors. The finance department knows what the business strat- egy is, and has a direct line to the CEO and the execution of business strategy. The general counsel, meanwhile, must partner with those two departments when it comes to managing shareholder activism, says Pressman. "Counsels are especially capable of understanding and handicapping risk, and at understanding compliance issues and having a more generalist, broader outlook than others may have," he says. "Partnering with these level directors and major shareholders. He points out that in-house counsel have a "huge role" in ensuring there are no mis- understandings over the course of such meetings. "You want to make sure that there's clarity over who said what, and that there's compliance with securities law," says Waitzer. The most obvious task for counsel is to ensure selective disclosure provisions are followed. "You can't have these meetings and have some sharehold- ers being told things that the market isn't being told," he notes. "That either creates a situation where they are kind of giv- ing up their liquidity rights in order to meet with management, or they're subject to potential insider trading." Accordingly, in-house counsel should attend any such meetings to ensure clarity and that rules are followed. We have this curious situation in corporate law where shareholders have rights, but no responsibilities. EDWarD WaiTzEr, Stikeman Elliott LLP other groups is very important, and will assist each of those groups, as well as the board, when it comes time to having to respond to particular activism." Moreover, in-house counsel must keep the board and management team up to date on trends and developments in the market, he adds. That role is enhanced by the knowledge gained by partnering with finance and investor relations, which can then be transferred by the GC to the execu- tive levels. "A board needs to be involved; it doesn't want to be caught off guard when activism bubbles up," notes Pressman. "A general counsel certainly doesn't want its board to learn about an activist agenda in the daily newspaper." Edward Waitzer, who leads Stikeman Elliott LLP's corporate governance group, notes that the rise in shareholder activ- ism has increased the frequency of meet- ings among boards of directors or top- Waitzer also highlights the role of in-house counsel in situations where a shareholder group wants to influence the company's direction, and perhaps put it in play. He references his work for BCE when Teachers' — its largest shareholder — essentially walked in and said it believed the company should be sold. "As soon as they disclosed their intention to sell, the compa- ny was for sale," explains Waitzer. "We then had to figure out what to do about that, and try to maximize value for everybody. But they made the decision, not the board of BCE." The same scenario could arise with any major pension fund or hedge fund, and with regard to various types of issues that relate to a company's direction going for- ward. Whatever the situation, counsel's role begins by essentially determining where the rights of shareholders lie, and at what point the responsibilities of boards and management teams take over. INHOUSE AUGUST 2011 • 27