‘Empty voting’ could decide Tembec takeover

In the view of Carol Hansell — who formed her law firm, Hansell LLP, in response to “a demand f or expert, i ndependent legal counsel in all areas of corporate governance” — shareholders who cast a vote while having no economic interest are “recognized as empty voting.”

“While that is inherent in the system, concerns are raised when empty voting has the ability to influence the outcome of the meeting,” said Hansell, who has authored reports on the plumbing associated with voting at meetings and the pale, male and stale status of most Canadian boards.

Hansell was offering a big- picture comment. But an empty voting situation is playing out now — a situation that Hansell, who is not involved, didn’t want to discuss.

The situation — concerning the planned takeover of Quebec- based Tembec Inc. by Florida- based Rayonier Advanced Materials — is set for a July 27 shareholders meeting. To get over the line, two-thirds of the shares voted at the meeting have to be cast in favour.

The takeover — in which shareholders can accept $ 4.05 in cash or 0.2302 of a Rayonier share — has become highly contentious in part because of the strong opposition of Oaktree Capital Management, Tembec’s l argest shareholder with a 19.9 per cent stake, and other shareholders.

This week, Oaktree said it intends to solicit proxies from those opposed to the deal. Oaktree opposes the US$ 807- million transaction for what it terms “a flawed and poorly timed process,” f or the l ack of explanation for the “material gap between Rayonier’s offer and Tembec’s intrinsic value,” and because of its view that a stand-alone Tembec would be a better alternative.

Oaktree also raises the issue of empty votes, illustrating that comment by referring to the activities of Fairfax Financial, Tembec’s largest shareholder, which had a 19.99 per cent stake when the transaction was announced on May 25. ( At that time, Rayonier and Tembec said Fairfax was “supportive of the transaction.”)

Now, thanks to a series of stock sales, the last being for 14.2 per cent of Tembec — a sale announced on June 19, which happens to be the meeting’s record date — Fairfax “no longer beneficially owns, or has control or direction over any of the outstanding share,” according to a filing. Fairfax issued three press releases ( June 9, 15 and 19) indicating sales of its Tembec shares.

On its latest filing, Fairfax said it sold its shares “to benefit from the recent appreciation of the market price of the shares. Fairfax and its subsidiaries no longer hold any shares.” On that sale, it received an average price of $ 4.30 a share. On its earlier filings, it received prices in the $ 4.32- to-$ 4.41 range. In other words, Fairfax received a higher price than Tembec’s shareholders stand to when they vote on the takeover. The shares closed Tuesday at $4.26.

A message sent to Fairfax seeking a comment wasn’t returned.

The situation may get very messy between now and next week’s planned meeting date thanks to a release issued Tuesday. In that release, Restructuring Capital Associates LP, a U. S.- based fund and Tembec’s secondlargest shareholder, said it “expects to vote against” the transaction “unless Rayonier improves its offer.”

Restructuring Capital, a Tembec shareholder for almost a decade ( it has a 17.1 per cent stake), said its support for the transaction depends on whether “Rayonier responds more appropriately to the points made by Oaktree … Oaktree makes a compelling case that Rayonier can and should improve its offer.”

With Oaktree’s 19.9 per cent stake and Restructuring’s 17.1 per cent, it’s impossible for the deal to reach the required two- thirds support level.