New York-based activist investor Bill Ackman said he is preparing to launch a proxy contest to replace the directors of Canadian Pacific Railway Ltd (CP-T
“We intend to run a proxy contest. We're going to replace CP's directors,” Ackman told The Globe and Mail in an interview Monday.
Ackman has been pushing CP to replace its chief executive officer, Fred Green, with retired Canadian National Railway Co. chief Hunter Harrison since last fall. Ackman's hedge fund, Pershing Square Capital Management, announced in late October that it acquired what is now a 14.2-percent stake in the railway.
CP's board of directors issued a public letter earlier Monday rejecting Harrison as a potential CEO candidate. The letter, from CP chairman John Cleghorn reiterated the board's support for Green and his corporate strategy. The move was received by Ackman as a sign that friendly discussions are no longer possible.
“Our plan is to install Hunter Harrison as CEO,” he said.
Pershing Square has already begun to solicit U.S. and Canadian candidates for an alternate slate, but Ackman said no decision has been made about how many directors it intends to propose. The planned alternative slate would have to be approved by a majority of CP shareholders.
Under Canadian law, investors are entitled to call a quick meeting of shareholders to vote for a new slate of directors, but legal experts said CP has the right to delay such a vote until its annual meeting. The company's annual meeting has not been set yet, but typically the session is held in May.
A proxy contest against Canadian Pacific's board of directors would mark the first time that one of Canada's largest companies and a board of so many establishment business leaders has been challenged by an activist. Cleghorn is a former CEO of Royal Bank of Canada and his fellow directors at CP include Suncor Energy CEO Rick George and former Liberal cabinet minister John Manley.
In a letter to the railway’s shareholders Monday, Cleghorn said the board fully supports Green and other executives.
“CP’s management team is aggressively executing on the company’s multiyear plan and has the full support of the board of directors,” Cleghorn wrote.
He said Calgary-based CP already has a strategy in place to become more efficient. “CP's multiyear plan has three key elements – driving volume growth, expanding network capacity to safely and efficiently support higher volumes and controlling costs,” he said.
The CP chairman also said Ackman is advocating fast change that is unrealistic.
“We reiterate our offer to have Ackman join our board so that a constructive board-level dialogue based on all the relevant facts and information can commence,” Cleghorn said.
CP has been seeking to improve its operating ratio, a key indicator of productivity that measures operating costs as a percentage of revenue. CP’s operating ratio ranks as the worst among North America's Big Six railways.
“The board is confident in CP’s ability to reach an operating ratio (OR), or operating expenses as a percentage of revenue, in the low 70s in the next three years. We will not stop there – as we achieve our goals, we will set new targets,” Cleghorn said.
He said CP’s board disagrees with Ackman’s move to install Harrison as the new CEO.
“Having considered Pershing Square’s demand, the board came to the unanimous conclusion that replacing the company’s chief executive officer, and thereby jeopardizing the successful execution of the multiyear plan, is not in the best interests of CP or its shareholders,” Cleghorn wrote. “Pershing Square did not provide a credible, detailed plan to improve CP’s operations or make any concrete suggestions - either in the presentation or in subsequent discussions.”
The letter to shareholders contained testimonials from two new appointees to CP’s board of directors, Tony Ingram and Ed Harris. Harris is a former top executive at CN who served for one year as a CP’s executive vice-president of operations, while Ingram is a former chief operating officer at CSX Transportation Inc.
“It is a mistake to underestimate the differences between the infrastructure of CP and CN. On the one hand, in CN you have a railroad that was built by Canadian taxpayers with twice the proportion of sidings and double track and that therefore benefits from significantly enhanced operating flexibility. On the other hand, CP has to contend with greater geographic challenges,” said Harris.
“I believe Fred Green and his management team have developed a well thought-out plan,” Ingram added.