Facing a contested election, Liquor Stores N.A. (Toronto Stock Exchange: LIQ) is paying brokers and advisers a per-share fee to deliver votes in favour of management. The use of a soliciting dealer group in the upcoming proxy contest with investor PointNorth Capital (“PointNorth”) could serve to entrench the current board, and forces voting shareholders to consider not just the competing strategic visions put forth by the two parties, but their conduct.
Soliciting dealer groups effectively amount to vote buying, by providing otherwise unbiased advisers and brokers with a fee for each shareholder vote that they deliver. The practice is fairly common (and uncontroversial) in certain situations, such as when a quorum of shareholder participation is necessary to approve an otherwise uncontentious transaction. It is far less common when used in a contested meeting, such as this one, where investors must choose between two competing agendas. Besides being a questionable use of shareholders’ capital, the practice is described by the Canadian Coalition for Good Governance (“CCGG”) as “inconsistent with the basic tenets of shareholder democracy.”
Investors (and particularly those in the United States) may be unfamiliar with the practice. In part, that’s because it’s unique to Canadian securities legislation, which unlike U.S. law does not impose a ‘best interests/fiduciary’ duty on broker-dealers. Moreover, its use in contested meetings is relatively infrequent, with the most notable instance being in the 2013 contest between Agrium Corporation and JANA Partners LLC, which drew headlines after JANA revealed that Agrium had not only contracted a solicitation scheme, but had done so covertly.
In this case, LIQ has been upfront about its scheme; however despite being aired openly the terms are still odious. The board of LIQ is paying C$100,000 to set up the scheme and offering brokers and advisers C$0.05 for every Canadian retail share voted in favour of the management slate (subject to a C$1,500 cap per retail shareholder), so long as the entire slate is reelected (the scheme does not apply to institutional investors).
Moreover, the board’s rationale for the scheme calls into question its understanding of basic concepts of governance. Ostensibly, the board is seeking to “ensure that shareholder democracy functions for small shareholders…” by paying off these small shareholders’ advisers to ensure their vote supports the board. The ‘problem’ that the board claims to be addressing is that Canadian securities law prevents it from communicating directly with retail investors who hold their shares through a broker (hence the scheme being restricted to retail investors). A more cynical view might be that the board is targeting those shareholders with the least access to third-party research and analysis – and the most dependence on brokers and advisers, who they presume to be impartial.
To be fair to LIQ, the dissident, PointNorth, has not exactly provided a model for constructive activism. After first announcing its ownership stake six months ago, PointNorth neglected to present its analysis and strategic plan (which would roll back U.S. expansion, speed up existing store refurbishment and radically overhaul the supply chain) until mid-May. In the meantime, it rejected settlement proposals that would give it two nominees, and declined to make counterproposals regarding board composition or identify potential candidates. Having finally set out their position, they (along with LIQ) structured their solicitation in a way that precludes any compromise: there is no universal proxy, meaning that shareholders may only vote on one of the two slates.
So, what to do? Well in the big scheme of things, it may be worth reviewing the absence of any fiduciary duties for Canadian broker-dealers. More immediately, PointNorth has applied to the Alberta Securities Commission to stop payments under the scheme. LIQ has responded stating the application is ”without-merit.”
As shareholders ponder their ballot(s), it will be interesting to see how governance concerns are balanced against strategic considerations. In light of the outcry over Agrium’s use of similar tactics back in 2013, it’s possible that the vote-buying scheme costs the LIQ board more than they bargained for.