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Concerned Shareholder Urges BlackBerry Board To Follow Lead Of Major Corporate Governance Advisory Firm And Oppose Watsa As Director

Dorsey R. Gardner, a long-standing shareholder of BlackBerry Limited  is urging the Company’s Board of Directors and shareholders to vote against V. Prem Watsa as lead director at the Company’s upcoming Annual General Meeting. Last Friday, Mr. Gardner sent a letter to the Board recommending that it follow the advice of Glass Lewis & Co. to vote against Watsa, citing “severe” concerns over Watsa’s failure to institute executive compensation practices that align pay with performance, and noting Watsa’s potential conflict of interest as the controlling principal of Fairfax Financial Holdings (“Fairfax”).

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In his June 18, 2021 letter to the Board, Mr. Gardner cautioned that Watsa is plainly unfit to serve as a director of the Company, let alone its Lead Director and Chair of the Compensation, Nomination and Governance Committee (the “CNG Committee”). Indeed, in its recent report, Glass Lewis & Co. urged shareholders to withhold votes from Watsa, who should be held accountable for executive pay practices that are not in shareholders’ interests. Glass Lewis observed that management, including CEO John Chen, may receive “excessive and undue windfalls” resulting from performance-based equity awards fueled by the retail trading phenomenon of January 2021 rather than the achievement of sustainable growth and shareholder returns. Enabling such pay windfalls, untethered to significant achievement and steady growth, undermines the long-term goals of performance-based compensation. Worse, such excessive compensation may render Mr. Chen beholden to Watsa, who chairs the CNG Committee and therefore wields great influence over Mr. Chen’s employment and compensation.

What’s more, Glass Lewis observed the precise concerns about Watsa’s loyalty which Mr. Gardner raised at BlackBerry’s 2020 Annual Meeting. According to the advisory firm’s recent report, Fairfax’s substantial holdings—including those resulting from the sweetheart September 2020 debt-refinancing deal (the “Fairfax Refinancing”) by which Fairfax can up its stake in the Company to more than 15% at the discount price of $6 per share—”give Mr. Watsa a set of priorities that does not align with those of other shareholders.” Indeed, Fairfax already attempted to acquire the Company in the past. And as recently as last summer, Fairfax, with Watsa negotiating directly with the Company, attempted to acquire a 20%-plus control block at a steep discount—without shareholder approval or other procedural protections to ensure fair dealing or fair terms in an otherwise hopelessly conflicted transaction with Watsa standing on both sides.

Spurred by the objections Mr. Gardner raised with the Board and regulators scrutinizing the Fairfax Refinancing, the Company had to revise the transaction to reduce Fairfax’s subscription for 1.75% convertible debentures to US$330 million such that Fairfax’s beneficial ownership of BlackBerry common stock, assuming conversion, would amount to approximately 16%. The deal revisions did not cure the transaction’s harmful dilution and oppression of minority shareholders. The transaction still enables Fairfax, controlled by Watsa, to become BlackBerry’s largest single shareholder at the low price of US$6 per share, a steep discount from the current market price of US$12.84 and the prior US$10 conversion price of the refinanced debentures.

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Rather than remove himself from the process, the obviously conflicted Watsa negotiated the Fairfax Refinancing directly with the Board and Company management. Despite his position of trust and confidence as the Company’s Lead Director, Watsa did not insist on adequate safeguards to ensure an arm’s length process that would protect the interests of and yield the best terms for BlackBerry and its unaffiliated shareholders. Instead, Watsa directly negotiated a sweetheart deal for Fairfax. The result: Fairfax has significantly increased its stake, at a low price, paving the way for it to potentially make a low-ball offer for BlackBerry’s remaining outstanding shares. In short, Mr. Gardner believes the Fairfax Refinancing was manifestly unfair to minority shareholders and the product of serious breaches of Watsa’s and all BlackBerry directors’ fiduciary duties of loyalty.

Watsa has a history, when presented with a conflict of interest, of working against the interests of minority shareholders and for the benefit of Fairfax. Even before the Fairfax Refinancing, in September 2019, the Quebec Superior Court rendered a judgment in which it found that Watsa and Fairfax, as insiders of Fibrek Inc., acted in a “blatant conflict of interest situation” for the benefit of Fairfax by enabling the acquisition of Fibrek at the “lowest possible price,” to the detriment of Fibrek’s minority shareholders who were bought out at an unfairly low price. The Quebec Superior Court, in awarding those minority shareholders $13.5 million plus interest, also found that Watsa abused his position of trust and confidence at Fibrek by failing to disclose Fairfax’s true intentions to Fibrek’s management, and that Watsa’s testimony at trial was not credible—indeed, the Canadian judge found Watsa’s explanations to be “mindboggling.” The judge further described the situation as “odious” and “reprehensible.” One who lacks credibility and engages in odious and reprehensible conduct to the detriment of minority shareholders is not fit to be a corporate director.

In light of Watsa’s failure as the CNG Committee Chair to institute compensation practices that align executive pay with performance, as recently reported by Glass Lewis, and Watsa’s history of misusing his insider positions at target companies for his own (and/or Fairfax’s) benefit at the expense of minority shareholders—both as described in the Fibrek case and as in the recent Fairfax Refinancing transaction, the Board must withdraw its recommendation of Watsa for reelection as a BlackBerry director. Furthermore, the Board must take action to protect BlackBerry’s common shareholders from oppression and breaches of loyalty. At a minimum, the Board should follow the lead of Glass Lewis and, at or before the Meeting, recommend that all shareholders withhold their votes from Watsa.

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