An activist hedge fund pushing for governance changes at Toronto-based Dye & Durham Ltd. DND-T has ripped into the heavily indebted legal software company after it made two acquisitions, calling it “the laughingstock of Canadian capital markets.”
In a letter to the board Wednesday, Arnaud Ajdler, managing director of New York-based Engine Capital, wrote that the fund “felt blindsided” by the deals, noting past assurances from D&D chair Colleen Moorehead that the board has no appetite for mergers and acquisitions and is prioritizing debt reduction.
The acquisition “flies in the face of these statements and compounds its credibility issues with shareholders,” Mr. Ajdler wrote.
Last week, D&D said it had purchased two Australian companies after its June 30 fiscal year-end for upwards of $69.3-million. The company is paying $21-million up front and $43.7-million in deferred consideration, plus up to $4.5-million in future contingent consideration.
While sell-side analysts asked D&D about the deals during an earnings call last week, they expressed little to no concern about them in subsequent research reports. The company’s net debt stood at $1.3-billion June 30 (before the deals were inked), up by 2 per cent from three months earlier but $88-million lower than Dec. 31.
Engine, which owns 7.1 per cent of the stock, has criticized D&D and its board for an alleged pattern of poor strategic decision-making, including misallocation of capital and mismanagement of a convertible debt refinancing, and by incentivizing acquisitions even if they don’t create shareholder value.
In an April letter to shareholders, Mr. Ajdler alleged that the result has been long-term underperformance. He has called on the board to push for better return on capital, increasing revenues from existing businesses and a more measured, disciplined approach to deals.
D&D spokesperson Wojtek Dabrowski said in an e-mail that Engine “continues to have a very limited understanding of our business and its dynamics. This is just the latest tactic in their campaign to seize control.” He added the company has “repeatedly stated” that its acquisition strategy is now to focus “on smaller, tuck-in transactions” and that it can do so while reducing debt.
But court documents show many other institutional investors have also expressed concerns to the board over issues including excessive pay for the chief executive officer, weak governance, poor transparency, high turnover, debt and the pace of acquisitions.
New investors were “scared and staying away” because of debt and “credibility issues,” then-chair Brian Derksen said in a 2023 deck he prepared for the board. Last fall, a group of investors pushed Mr. Derksen to resign, then withheld their votes from him at the December annual general meeting when he didn’t.
Those documents surfaced in a court battle touched off by Engine. The New York hedge fund earlier this year requested the removal of D&D directors Brian Derksen, Ms. Moorehead and Leslie O’Donoghue at a special meeting, and proposed three of its own nominees.
D&D said Mr. Derksen, who resigned as chair this year, would not stand for re-election, and it announced Ms. O’Donoghue’s departure in July. Another hedge fund, Blacksheep Master Fund, also wants to nominate a director. The special meeting was originally set for Aug. 20.
Then, in June, D&D’s ex-chair, Tyler Proud, brother of CEO Matthew Proud, launched an attempt to remove his nominee to the board, Edward Prittie. Tyler Proud’s holding company, OneMove Capital, asked that D&D include a proposal at the special meeting for shareholders to vote off Mr. Prittie, and instead vote for his new nominee, hedge fund manager Eric Shahinian.
Tyler Proud, who doesn’t have the right to remove a director, said he had pushed D&D to no avail to address many of the same concerns raised by Engine. D&D in turn accused him of trying to improperly control the company after being “a combative and disruptive force” on the board prior to his exit in 2021.
D&D agreed to put forward Mr. Shahinian’s name but not the proposal to vote off Mr. Prittie, calling the move invalid because it stemmed from a personal grievance. OneMove sued and D&D sued back, delaying the special meeting. An Ontario Superior Court judge heard the case last month but hasn’t ruled yet.
If OneMove wins, it could result in four dissident-backed outsiders joining the seven-person board, upending the power balance. If D&D wins, that would leave five dissident-backed nominees contesting three spots.
D&D has been at the centre of a lot of drama since going public in 2021. Its penchant for sharply hiking prices charged by acquired companies has angered clients, an attempted multibillion-dollar takeover of an Australian company failed and Britain’s competition regulator forced D&D to divest a purchase.
The company has taken steps to ease its heavy debt load and cut costs, and several senior leaders left this year. But its stock has languished, trading at less than two-thirds of its price in early 2022.
Editor’s note: A previous version of this story incorrectly stated Engine’s owns a 5.1 per cent share in Dye & Durham; Engine owns 7.1 per cent of shares. his version has been corrected to say it owns 7.1 per cent of the stock. The previous version was missing a component of the pricing in Dye & Durham's acquisition of two Australian companies. The purchase price was upwards of $69.3-million. The company is paying $21-million up front and $43.7-million in deferred consideration, plus up to $4.5-million in future contingent consideration.