Matt Proud, Dye & Durham Ltd. chief executive officer, is stepping down.Sydney Wong/Supplied
In September, 2022, a sell-side analyst e-mailed Arnaud Ajdler about a company he covered, saying it might be a good investment opportunity.
When the activist New York hedge fund manager spoke with the analyst, he learned the shares were undervalued in part because “a large majority of shareholders do not trust the company’s CEO,” Engine Capital said in a regulatory filing last week. The CEO was Matt Proud. The company was Dye & Durham Ltd. DND-T, Mr. Ajdler decided to pay closer attention. A year later, Engine started buying the stock.
Two years after that interaction, Engine’s subsequent activist campaign against D&D has turned the Toronto real estate software company upside down. Last week Mr. Proud resigned after a chaotic few days during which he and other executives threatened to sue shareholders including Engine for allegedly trying to illegally take over D&D and thwarting a company sale process. The CEO had also threatened to sue the board, making peace by negotiating a $10-million severance.
The turmoil follows months of vain efforts by Mr. Proud and two board allies to press other directors to sue Engine and three other investors that had pushed for changes: Edgepoint Investment Group Inc., Mawer Investment Management Ltd. and his brother Tyler Proud’s holding company. At the Dec. 17 annual meeting Engine aims to elect a rival six-director slate instead of D&D’s seven-person slate.
The CEO’s personal holding company is D&D’s top investor, with 16.2 per cent of the stock. Engine has 7.1 per cent, Tyler Proud controls 8.1 per cent, and Edgepoint and Mawer have 15.1 per cent and 6.6 per cent respectively, giving the four 37 per cent of votes. Fidelity Investments, whose position on the board battle is unknown, has 8.4 per cent.
Regardless of the outcome, Mr. Ajdler has already had a big impact: D&D’s slate includes four newcomers, and it will soon have a new leader. Engine is well in the money on paper: the stock closed Friday at $20.85, up 63.6 per cent from the $12.74 Engine paid on average for its 4.75 million shares.
Engine’s filing states that a year after first contact with the analyst it began in-depth research, contacting ex-employees to get their confidential views on D&D’s business, strategy, culture and prospects.
Its initial thesis was that D&D “possessed valuable assets but was mismanaged and suffering from a poor culture that stemmed from its current CEO,” the filing reads. It cites Mr. Proud’s poor rating on Glassdoor, which tracks employee sentiment, heavy management turnover and “constant deal-making leading to the company becoming over-levered, overpaying for assets and poor post-acquisition integration.”
Engine wasn’t alone. Investor discontent has dogged D&D since 2021, when the board agreed to a huge equity award for the CEO after he abandoned a management buyout. When then-chairman Brian Derksen surveyed shareholders in fall 2022 and 2023, he encountered a litany of misgivings.
Shareholders were “confounded, looking for clear direction and consistent action” and unclear about its value-creation plan, he wrote the board 14 months ago. Prospective investors were scared off by its high debt from a string of acquisitions and “credibility issues.” Last fall, some investors pressed for board changes, prompting two directors to leave.
When Mr. Ajdler met Mr. Proud and chief financial officer Frank Di Liso last December he asked if D&D planned to issue equity. “The CEO vehemently denied” he would approve that as the stock was at depressed levels and “doing so would undervalue the company,” its filing states. (A D&D spokesman declined to comment).
Engine started buying the stock that month. Weeks later, D&D announced a highly dilutive equity offering, selling 10.4 million shares for $12.10 each – below what Engine had paid and lower than what D&D had shelled out in a stock buyback months earlier. Engine bought 1.25 million shares in the deal but the CEO’s “abrupt reversal” on issuing shares and negative feedback from ex-employees and analysts confirmed its thesis, the filing states.
Engine “determined that pursuing appropriate changes in the company’s leadership could lead to significant value creation.” It launched its campaign on Feb. 13, initially proposing to appoint two directors or request a special meeting of shareholders for their support. Company representatives accused Engine of acting jointly with other shareholders, an accusation Engine calls “entirely unfounded” and “baseless,” but which D&D has continued to lob at the activist. Engine acknowledges it spoke with other fund managers named by D&D and has “maintained contact with key shareholders” to understand their “general sentiment.”
By September, after its special meeting was postponed because of another governance-related legal challenge by Tyler Proud’s company, Engine began to think broader change was needed. It hired a search firm to find additional director candidates – it is set to send its circular to investors this week – and potential CEO replacements. That means that in addition to rival board slates, there are also two search processes under way for a new CEO.
D&D’s circular makes the case for sticking with its strategy of pausing “significant” mergers and acquisitions activity to focus on reducing debt, now at 5.2 times adjusted operating earnings, except for small deals.