Board and management of real estate developer Genesis Land Development Corp. find themselves in an unexpected fight for survival, pitted against activist directors who have launched a surprise strike for control of the company’s board.
Calgary-based Genesis told shareholders July 26 that it is facing a proxy battle for control of the board at its August 12 annual meeting. The same day, Smoothwater Capital Corporation, announced its plan to acquire control of Genesis and its reasons for the hostile approach.
Toronto-based Smoothwater claims to control nearly one third of the Genesis shares. Established in May by its chairman Garfield Mitchell and CEO Stephen Griggs, it holds a 22% stake in Genesis. Mark Mitchell, Garfield Mitchell’s brother, sits on the board of Genesis and owns another 9% of Genesis shares.
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Rough few years
Genesis has suffered through a series of musical chairs at the top since the company’s founder, President and CEO Gobi Singh resigned in 2011. The activists do not believe the new blood at the board has turned the company around, and is pushing to turf most of the directors in favor of its slate.
William Pringle, a Genesis Director and Chair of the Special Committee, said in an interview that the board was initially taken aback by the declaration of a proxy war. It was “totally out of left field. I am on the governance committee and I had no inkling of it until a conversation on July 4th.”
Pringle added that the board held discussions with the dissidents in days following the initial demands of the dissidents “trying to find if a compromise would satisfy the interests of all parties up until the 17th of July.” There has been little or no communications between the two sides since.
Pringle and most of his Genesis board colleagues appear ready to put up a determined fight against the activist group. “All these people are associated and they are buddies and they want to control the board. It doesn’t make sense for a good governance practices point of view to me.”
Smoothwater’s key complaint is that the Calgary developer has underperformed for a couple years now. Pringle counters that a number of changes were made recently that need time to take effect.
“The board went through a lot of renewal at the last annual meeting 10 months ago, that was when I was elected. So we have only had 10 months to do this and we are in the middle of a process that frankly was supported by (dissident directors) Loudon Owen and Mark Mitchell to evaluate the strategy and hire a new management. We have a brand new CEO and CFO where Mark Mitchell ran the hiring process just a few months ago. They were hired in the middle of February.
“It takes time to turn a land and housing company around. Yes it has some things it needs to accomplish but it is well on its way to doing so.”
Complaints and demands
In its proxy to shareholders, Smoothwater states share value has suffered due to “a lack of clear strategy, direction and transparency from the existing board.”
Specifically, it claims:
· The net asset value per share of Genesis “decreased at the alarming rate of over 11% in 2012 – in a rising Calgary real estate market – and by approximately 20% since 2009, while at the same time there have been no distributions to shareholders or share buy-backs.”
· Genesis shares “trade at a massive discount to NAV – over 50% as at December 31, 2012” and continue to trade well below fair value.
· The performance of Genesis shares “in the last three years of turmoil at the board has dramatically lagged the TSX real estate sub-index by more than 30%. By way of example, Smoothwater said Genesis shares lag Melcor Developments Ltd., “its closest public peer” by nearly 80%.
Smoothwater describes the Genesis board as “highly politicized” and “focused as much on partisan interests and balance of power issues as on the business of Genesis.” The group takes issue with the board’s refusal to appoint the current Genesis CEO to the board.
Smoothwater also has complaints about incumbent directors and corporate governance practices.
· Except for two directors (Mark Mitchell and Loudon Owen), the directors own just 0.36% of the shares in the company, which Smoothwater argued gives them “virtually no personal alignment with the shareholder interests they are charged with representing.”
· The board “has not had a strategic focus.”
· The Genesis board “has not nominated the CEO to the board (a customary and appropriate practice for a Canadian public company) – which we intend to propose to the new board.”
· The board “has not adopted a number of governance best practices such as “majority voting” and “say on pay” and has not properly disclosed the prior year’s voting results of its shareholders meeting, or the Chair’s other public company directorships.”
Off guard, but fighting back
While Genesis management said that they were taken by surprise by the hostile play to oust them from control of the company, they have begun to fight back.
This week the company said it would launch a ‘poison pill’ shareholder defence, which involves issuing more shares to buy it time to come up with an alternative to Smoothwater’s bid.
Smoothwater’s Griggs was dismissive of the Genesis response to its bid. “We see these defensive tactics as a desperate attempt by a majority of the board to retain control of Genesis, and to try to stop shareholders from legitimately buying shares and from being able to change the board as is their right,” he told the Calgary Herald.
“While these tactics are clearly directed at Smoothwater, they will not have any impact on our proxy fight with the entrenched elements of the board.”