Dye & Durham Ltd. DND-T is stepping up its counterattack against activist shareholder Engine Capital LP, accusing the New York hedge fund of causing it “significant damage” and threatening legal retaliation.
In the letter to Engine’s Canadian legal counsel, obtained by The Globe and Mail, D&D’s securities and litigation lawyer Joseph Groia said the company is investigating “significant concerns that Engine breached and continues to breach Canadian securities laws.” He said D&D believes Engine is acting with other shareholders in violation of early warning disclosure obligations as well as insider trading and takeover bid rules.
Mr. Groia alleged Engine had offered to pay D&D employees in an attempt to improperly solicit confidential and proprietary information. He wrote the company may file complaints with legal and regulatory authorities and seek injunctive or other relief or damages “to remedy harm suffered by the company.” He demanded Engine preserve all documents, recordings and evidence related to the matter.
“We have serious concerns regarding Engine’s conduct, which our board has a duty to investigate,” D&D spokesman Wojtek Dabrowski said in an e-mail to The Globe. The letter “outlines the nature of those concerns,” he said, declining further comment.
Engine called the letter “a desperate move” in an e-mailed statement and said the threat of legal action is “an attempt to intimidate us into standing down and to try to distract from the board’s pattern of poor decisions and the company’s long-term underperformance.” Engine added “these are nothing more than false and self-serving allegations that Engine will fight vigorously – and this tactic only further reinforces the need for significant change at Dye & Durham.”
The Globe has reviewed LinkedIn messages sent in recent months by Engine managing partner Arnaud Ajdler to two ex-D&D employees and spoke with one of the recipients. The Globe is not identifying the former employee as they are not authorized to discuss the matter. The messages specified Mr. Ajdler was looking to speak with former executives – not current employees as Mr. Groia wrote – and offered compensation if they would speak with him confidentially. Engine said in its statement it had only pursued former employees for information.
Mr. Ajdler, whose firm owns 6.6 per cent of the Toronto legal software company’s stock, accused D&D of “underperformance and strategic missteps” in a letter to shareholders last month, criticizing its stock performance, capital allocation and management of a convertible debt refinancing. He said D&D was pursuing the wrong long-term target by aiming to increase operating earnings to $1-billion a year, calling it an arbitrary measure that incentivizes acquisitions even if they don’t create shareholder value. He called on the board to change its incentive structure to optimize return on capital, focus on increasing revenues from existing businesses and take a more measured, disciplined approach to acquisitions.
D&D at the time accused Engine of displaying “a stunning lack of understanding of the key value drivers” of its business and grossly mischaracterizing its track record.
A showdown is set for Aug. 20 at a special shareholder meeting called at Engine’s behest. Engine has requested the removal of three directors – Brian Derksen, Colleen Moorehead and Leslie O’Donoghue – and proposed three of its own nominees to replace them. D&D announced in March that Mr. Derksen, its chairman, would not stand for re-election and that Ms. Moorehead would succeed him in the interim.
The company has since received notice from a second activist fund, Ireland-based Blacksheep Fund Management, which said it may nominate its chief investment officer to join D&D’s seven-person board. Both funds have previously targeted Canadian companies in activist campaigns. D&D has retained Goldman Sachs as a strategic adviser.
The heavily-indebted company closed a US$905-million debt financing last month that gives it financial breathing room. D&D’s stock has rebounded after sinking to an all-time low of $7.46 last October – slightly below its July, 2020, initial public offering price. The stock has rebounded and traded recently between $14 and $15, well off its 52-week high of $21.21, and less than one-third of peak levels attained in mid-2021. Still, DND is one of the top performing Canadian technology companies among the 20 that went public on the TSX in 2020 and 2021.
The company has specialized in buying up legal software providers in Canada, then raising fees for such services as property transfers. It has also pursued acquisitions in other markets, including Britain and Australia, though it was forced by Britain’s competition regulator last year to divest a company that provides software for handling real estate property search reports.
More recently, investors have been troubled by D&D’s high debt levels. Its ratio of debt to operating profit in the 12 months ended Dec. 31 was 6.3, deemed “high” by Moody’s Canada in a recent report, although that was before D&D raised $139.5-million in a bought deal stock offering in February and completed its debt refinancing.