The 75 shareholders who gathered in a downtown Toronto meeting hall on Sept. 4 for a special meeting of Toronto-based Union Enterprises Ltd. were ready for a fight. They said that they were upset about a complicated plan to restructure the company. But just moments after Union chairman George Mann rose to begin the meeting, he tersely announced that three financial institutions with extensive holdings in Union had decided to scuttle the proposal by voting against it. Even though the company had discussed the plan openly since July 3 and had spent $1.5 million preparing it, the shareholders still revolted. Said Mann: “It’s no longer on the table.”
The tough opposition that Union faced made executives across the country sharply aware of the need for better relations with their investors. In recent years larger institutional shareholders have become more vocal about
their rights. And the merger mania that swept across North America in the 1980s has forced many investors to take a critical look at corporate plans. Indeed, last week executives at Bow Valley Industries Ltd. of Calgary staged a major investor-relations campaign in Toronto in an attempt to convince shareholders to accept a proposed $1.4-billion investment in the company by British Gas PLC of London, England. Said stockbroker William Allen, president of Allenvest Group Ltd. of Toronto: “When companies pay attention to their shareholders, the shares generally trade at higher prices. It is just good business.”
Investor relations became an established practice in Canada only in the past decade, but recently activity in the field has started to boom. In the past two years membership in the two Canadian branches of the Washingtonbased National Investor Relations Institute (NIRI) has jumped to about 100
firms from just 20. And Canadian companies that have listings on U.S. and other foreign stock exchanges are finding that investor relations are critical to their success.
As a result, a new group of professionals known as investor relations specialists has emerged. The job of an investor relations specialist is to ensure that a company’s stock is trading at the best possible price. That, in turn, means that a company will find it easier to raise money either by borrowing or issuing new stock, said Lome French, president of NIRI Eastern Canada. To do that, he said, the corporate spokesman must develop close links to the brokers who keep track of his company and with important investors such as pension fund managers. Said French:
“Your role is to make sure that your company is well understood.”
For turbulent Union Enterprises that is a major challenge. In one of the bloodiest takeover battles ever waged in Canada, Unicorp Canada Corp. of Toronto acquired 60 per cent of the shares of Union in mid-1985. During the battle, Union acquired Calgary-based Burns Foods Ltd. in an unsuccessful bid to stop Unicorp. As a result, Union gained holdings in a wide range of businesses. But after the Unicorp takeover, analysts said they expected that Union would pursue a policy of diversification and growth.
But Union’s new management team, which is dominated by Unicorp executives, faced a knotty problem. Union was not earning enough money to pay its stock dividends and, as a result, it had to borrow money to meet its obligations to shareholders. Last year, when Union management advised the company’s board of directors that the dividend should be cut, the directors rejected the suggestion because they said that they considered dividends vital to the firm’s small shareholders.
As an alternative, the directors put forward a complex corporate restructuring which would have replaced the minority shareholders’ voting common stock in Union with nonvoting preferred stock in a new company. That company would have owned only Union’s gas utility. Unicorp would then take all the remaining assets of Union Enterprises—and all the voting shares in the new gas company. Union directors said that they based their recommendations on the results of an
unusual poll of shareholders that Decima Research Ltd. conducted during the takeover battle.
Eric Evans, Union’s assistant vicepresident for investor relations, said that the poll reflected the importance that shareholders attached to dividend payments. But when the proposal was made public, the company’s largest shareholders objected to the restructuring. A number of factors contributed to investor unease about the proposal.
Among the major concerns was the sudden move away from preferred stock issues on the markets. There was also criticism that the deal was too complicated and costly.
Union’s failure to get its message across carried a large price tag.
The firm’s investment advisers, McLeod Young Weir Ltd., received $725,000. And other costs brought Union’s total outlay to an esti-
mated $1.5 million. As part of the deal, McLeod and Toronto stockbroker Gordon Capital Corp. were paid $50 for each shareholder who agreed to vote in favor of the proposal, and received no payment if the shareholder opposed it. That practice “raised eyebrows” at the Ontario Securities Commission, said director Ermanno Pascutto.
The rejection of the Union plan had an immediate impact on all shareholders. Moments after withdrawing the proposal, Mann announced that Union was cutting its dividend to 50 cents a year from 80 cents. And less than a week later Union announced that it had agreed to sell an investment in Numac Oil & Gas Ltd. for $62 million. Allen said that those actions 3 amounted to a direct
contradiction of many investors’ wishes to leave the company alone. Added Allen: “It seems to me like man-
agement is thumbing its nose at the shareholders.” Still, some investor experts said that there is a limit to how much consultation there can be with shareholders. French said that there is a fine line between keeping large investors informed and providing insider information, which would contravene securities legislation by giving certain shareholders information from which they could profit.
Another management group faced with a similar shareholder challenge is now lobbying hard to win the approval of its large investors before they vote on a major corporate restructuring. On Aug. 3, Bow Valley Industries Ltd. and British Gas PLC announced that the British utility would pay $575 million, or $20 per share, for one-third of the company, with the option to raise its stake to 51 per cent by March 31, 1990, for an additional $800 million. The money raised from the sale would allow Bow Valley management to expand. But a dozen institutional shareholders, including Quebec pension fund Caisse de dépôt et placement du Québec, quickly voiced opposition to the proposal. Said one Toronto financial analyst: “This is a classic case of management who believes that this is a good long-term plan. But shareholders have a short-term performance perspective—and they have the votes.”
In fact, Bow Valley’s chairman and chief executive officer, Daryl (Doc) Seaman, whose family’s shares were placed in a holding company in June,
1986, and sold to the public in May,
1987, for $19 per share, did not approach the firm’s stockholders before signing the agreement with British Gas. Keith Lazelle, vice-president of investor relations at Bow Valley, said that Seaman was surprised by investor reluctance, but he added that Seaman now realizes that it is the shareholders he must convince. But French said that Bow Valley is a case where “the issue of the shareholder was not really considered seriously by the executives. So it is investor relations after the fact.”
Investor relations specialists have to convince investors that the deals they are offering will ultimately make them more money and not just rearrange assets. Union president James Leech told Maclean's, “There is a cynicism toward what some people see as paper-shuffling.” As a result, some investor relations specialists say that building bridges between corporate strategists and shareholders will become steadily more important as the investors with the votes pay closer and closer attention to how they exercise them.
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