November 16, 2014

As autumn drifted into winter in 2013 core networking vendor Juniper Networks (NASDAQ: JNPR) slowly moved to come to terms with well-known activist hedge fund Elliot Management. The agreement between Juniper and Elliot was constructed out of several components: replacement of longtime Chief Executive Kevin Johnson with an Elliot-approved nominee (Mr Shaygan Kheradpir, who came from Barclays),  an issuer bid resulting in a $2 billion share buyback, significant cost reductions and the granting to Elliot of the right to nominate two directors.  (See our earlier blog post on the subject). Elliot, which retained just under a 9% shareholding, continued to push the company; the risk of a proxy fight lurked, omnipresent, in the background.

Perceptions that Juniper would accede to activist demands had bolstered JNPR’s share price from $20 to ~$27.50 but the activist script did not play out as expected. This week the new CEO  resigned a few days after headlining the annual analyst and investor conference. He had been in situ for 10 months. Juniper’s board hinted at issues around a commercial relationship with an overseas customer, but the core of it would appear to be general management style. “It’s the board’s responsibility to support the executive in place until that change happens and that change took place last night,” Juniper’s Chairman Mr Scott Kriens told investors on a conference call. “In the board’s judgment, the conduct was inconsistent with our expectations, but it’s really about the definition of leadership at Juniper.”

The new CEO, Mr Rami Rahim, is a 17 year veteran of Juniper.

“I joined this phenomenal company as an agent of change,” Mr Kheradpir had said in a statement at the time he ascended to the CEO perch. “The initiatives announced today are based on a comprehensive review of our business and customer needs, and we are confident that they will drive long-term, profitable growth by capturing greater share in the most meaningful market segments.” Activist programmes do not always turn out as planned… The high water mark of JNPR shares was the day Mr Kheradpir announced the share buyback. Since than JNPR has fallen and the shares have under-performed rivals Cisco and Brocade (green and purple lines on the chart).

Blog Post 15 November Juniper

Source: S&P CapitalIQ

In this context recent Canadian moves to create a “voting pill” mechanism are quite interesting. This discussion emerged in the context of the growing profile of activist campaigns, the relatively recent and salutary lesson of an establishment-heavy board at Canadian Pacific being ousted in a spat with the activist group Pershing Square, and the impending vote on Valeant/Allergan (wherein an activist acted in concert with an acquirer). This new “voting pill” concept is designed to arm Canadian boards with a sharper edged tool to use against the unwanted attentions of  hedge funds.

The  Canadian “voting pill” tactic would significantly broaden the definition of a “beneficial owner” of shares. Historically boards have attempted to make use of defensive mechanisms – such as the dilutionary “poison pill” – when one individual, company or fund breaches the 20% ownership threshold. This can trigger the issuance of shares (at attractive prices) to the other owners not deemed to be an “acquiring person”. Poison pills had faced much resistance in Canada.

The voting pill concept  conglomerates funds and companies acting together in pursuit of a common goal (takeover) or corporate agenda. If they together own 20% then they collectively trigger status as “acquiring persons”. In Juniper’s case, for example, Elliot was supported by other activist funds.

Canadian boards acting in this manner will undoubtedly face legal challenges, but even in losing they will have found a way to buy substantially more time to co-ordinate strategic planning and messaging to investors. Moreover some court rulings have been directionally supportive of voting pillsnotably the Alberta Court of Appelas ruling Genesis Land Development v. Smoothwater.  Other court cases firmly defend shareholder prerogatives (Canada has historically been closer to acquirer-dfriendly Britain that the US), but there is now ambiguity about whether hedge funds acting in concert may even be  subject to reporting requirements the moment they collectively own more than 10% of the securities of a company.

We therefore believe that “voting pills” can be passed by boards, implemented, challenged and (in all likelihood and regardless of the effects on the requirement to report ownership) probably not upheld by the courts. All the same, if voting pills are structured properly they will lengthen the time a board has to prepare win over investors to an existing plan, propose a revamped strategic direction or even gird for a proxy fight.

Sometimes this may result in concluding that an activist is right, and that a  corporation requires a change of focus and/or strategy. At other times boards may be right to reject some ore all of the proposed measures. In each case the use of an independent adviser (one unencumbered by the myriad conflicts of interest – such as trading for hedge funds – that bedevil the bulge bracket and Canadian bank-owned firms) can prove to be helpful.