Concerned Shareholder Urges BlackBerry Board to Guard Against Unfair Buyout Bids and Oppose Watsa as Director as Board Considers Strategic Alternatives

WATERLOO, ON, June 22, 2023 /CNW/ -- Dorsey R. Gardner, a long-standing shareholder of BlackBerry Limited ("BlackBerry" or the "Company") is urging the Company's Board of Directors ("Board") and shareholders to vote against V. Prem Watsa as lead director at the Company's upcoming Annual Meeting. Mr. Gardner is concerned by the Board's recent announcement that it is considering strategic alternatives—on the eve of the Company's projected return to profitability and the maturity of the 1.75% debentures, when Fairfax Financial Holdings ("Fairfax"), led by Watsa, will be able to convert its debentures to common shares and increase its stake in the Company to 16% at a mere $6.00/share. Mr. Gardner believes these circumstances make the Company and its common shareholders susceptible to a buyout by Fairfax at an unfairly low price. Accordingly, Mr. Gardner is urging the Board and shareholders to vote against Watsa as a director, given his conflict of interest as Fairfax's principal. Mr. Gardner is also urging the Board to resist unfair take-private bids and implement safeguards to protect minority shareholders. Mr. Gardner sent the following letter to the Board.

Demand to Protect BlackBerry Shareholders from Oppression by Insiders

Dear BlackBerry Directors:

The Board of Directors of BlackBerry Limited (the "Board") must discharge its fiduciary duties of loyalty and care by taking prompt action to protect BlackBerry minority shareholders from the threat of an unfair buyout presented by the Board's recently-announced consideration of strategic alternatives. As you may recall, I am a long-term investor in BlackBerry Limited ("BlackBerry" or the "Company"), holding approximately 5,000,000 shares of the Company's common stock.  I write to demand that the Board take action to prevent Company insiders, such as BlackBerry Lead Director V. Prem Watsa ("Watsa") and his affiliates, from depriving unaffiliated common shareholders of the opportunity to participate in the Company's expected profitability over the next three years and beyond. Specifically, as the Board undertakes its "portfolio review," it should adopt protective measures to prevent Company insiders from acquiring the Company's common shares or any of BlackBerry's businesses. Long-term common shareholders who have stood by BlackBerry through the Company's turnaround are entitled to benefit from the expected returns generated from the forthcoming revenue and margin growth in the Company's core QNX and Cybersecurity businesses.

Since 2020, I have urged the Board to take action to protect the Company and its common shareholders from Watsa, whose interests as controlling principal of Fairfax Financial Holdings ("Fairfax") are adverse to those of the Company's unaffiliated shareholders. Nevertheless, the Board proceeded with a September 2020 debt-refinancing deal by which Fairfax has increased its stake in the Company to 16%—without paying a fair premium—assuming conversion of its 1.75% debentures ("Fairfax Debentures"), which will likely occur by or before November of this year, when the Fairfax Debentures mature.¹

The timing of the Board's consideration of "various strategic alternatives"—coinciding with the Company's announcement of a "return to profitability" and the looming November 2023 deadline for conversion of the Fairfax Debentures—is alarming to say the least. It raises serious concern that Fairfax, with the hopelessly conflicted Watsa at the helm, will pursue a transaction that will benefit Fairfax and deprive unaffiliated BlackBerry shareholders of their right to participate in the Company's impending profitability. Consistent with its members' fiduciary duties, the Board must take prompt action to prevent such shareholder oppression.

BlackBerry is in a long lead time business, but the payoff is imminent, as the Company is poised for its long-awaited return to profitability and corresponding shareholder returns. It has recently forecasted significant revenue and margin expansion in both its IoT and Cybersecurity segments. In the next several years BlackBerry will receive a waterfall of very high margin royalties from prior placements of QNX software with virtually all of the major OEM auto companies—placements which have occurred over the last four or five years. Indeed, according to recent Company statements, a backlog of QNX production-based royalties, which will be realized over the next couple of years, will deliver margins of nearly 100%. The Company's exciting IoT outlook does not even include IVY's potential to yield significant revenue growth in partnership with Amazon. Gross margins for the Cybersecurity unit also are expected to increase by between 400bps and 600bps by 2026. While most tech companies are in layoff mode, BlackBerry is trying to fill more than 150 open positions—another indicator that the Company's turnaround is moving into high gear. Indeed, McKinsey has commented that BlackBerry is well-positioned to capitalize on the convergence of the IoT and cybersecurity sectors.

Based on comparative values of companies like CrowdStrike and CyberArk, it is not overly optimistic to project BlackBerry's stock price to be $15-$25/share in the next 12-18 months if John Chen and his team can achieve their realistic projections. BlackBerry stock has underperformed due to the failure (to date) to produce the all-important ramp in revenue and earnings—a failure that should be remedied when the forecasts BlackBerry issued last month are realized. I believe BB's underperformance is also due to a "Watsa discount" stemming from the possibility that Watsa could use his position on the Board to engineer a deal for Fairfax to acquire BlackBerry at a lowball price and prevent unaffiliated shareholders from participating in BlackBerry's upside. Highlighting this "Watsa discount," more than 49% of BlackBerry shareholders (based on last year's vote) agree that Watsa should not have a seat on the Board.

Accordingly, now is not the time for the Board to consider a buyout—let alone an insider-affiliate buyout at an unfair price. Common shareholders who have endured the expenses of IoT and Cybersecurity development phases are entitled to participate in the Company's return to profitability. The Board must ensure that unaffiliated shareholders are not excluded from this return to profitability through the pursuit of a "strategic alternative" involving an insider-affiliate such as Fairfax, which is already set to acquire a nearly controlling stake in the Company through the conversion of the Fairfax Debentures on the eve of the Company's expected revenue and margin growth through 2026.

In short, the Board must safeguard the interests of all BlackBerry shareholders by avoiding unfair transactions with insider affiliates designed to benefit such insiders to the exclusion of unaffiliated common shareholders. At a minimum, the Board should exclude Watsa from its assessment of strategic alternatives given Watsa's clear conflict of interest. Between Fairfax's 2013 attempt to acquire BlackBerry and Watsa's 2020 negotiation of a sweetheart deal for Fairfax—the Fairfax Debentures—which paves the way for Fairfax to acquire a large block of BlackBerry stock at a lowball price, Fairfax has repeatedly demonstrated a desire to acquire BlackBerry at a discount price and, therefore, Watsa's interests plainly do not align with those of other shareholders.

Not only do Watsa's interests materially differ from those of BlackBerry's unaffiliated shareholders, but Watsa also has a history of disregarding his fiduciary duties in favor of his interests as Fairfax's principal. Even before the 2020 Fairfax Debentures, 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" (emphasis added) 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." (Emphasis added.) 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, let alone BlackBerry's Lead Director and member of the Compensation, Nomination and Governance Committee (the "CNG Committee"). Minority shareholders and loyal BlackBerry employees expecting to be rewarded through equity-based compensation deserve much better.

To be sure, excluding Watsa from the Board's consideration of strategic alternatives and appointing a special committee of independent directors to review such alternatives is the bare minimum course of action the Board must take to protect BlackBerry shareholders. But even that is not enough. Fiduciary responsibility dictates that the Board take action to remove Watsa from the CNG Committee. In that role, Watsa wields outsized influence over the nomination and compensation of other Board members, potentially compromising their independence and rendering other directors effectively beholden to Watsa. The Board should also implement a shareholder rights plan or other appropriate measures to defend the Company and its shareholders from an unfair buyout. Moreover, members of the Board should just say no to any proposal that does not present an adequate premium over values to be expected following the realization of BlackBerry's return to profitability.

Equally troubling is the Company's announcement that Morgan Stanley & Co. is advising the Board in its consideration of strategic alternatives. Morgan Stanley, like Watsa, is potentially conflicted. Fairfax has paid Morgan Stanley substantial sums in underwriting and other advisory fees in recent transactions. Morgan Stanley's apparent conflict of interest in advising Fairfax acquisition targets has been widely reported. For example, in its article, "Streetwise: Morgan Stanley's role in Atlas Corp take-private deal raising eyebrows," TradeWinds questioned Morgan Stanley's role in advising directors of Atlas Corp. in a Fairfax affiliate's recent acquisition of Atlas, while the bank simultaneously received significant underwriting fees from Fairfax in its pursuit of an IPO for a Fairfax portfolio company.² The Board must discharge its duties of loyalty to all BlackBerry shareholders and seek independent financial advice in its assessment of strategic alternatives. That is, the Board should dismiss Morgan Stanley from this engagement given the firm's potential conflict of interest. The involvement of a firm like Morgan Stanley signals that the Board is not conducting a mere portfolio review, but rather considering a buyout or take-private transaction, which the Board must resist at this time to safeguard the interests of BlackBerry's unaffiliated common shareholders. I believe the Company's disclosure regarding the Board's "review of the Company's portfolio," including "the possible separation of one or more of BlackBerry's businesses," is misleading. If the Board is considering a buyout, it must completely and accurately disclose this to shareholders, consistent with the Board's duty of candor.

In sum, the Board should take the following actions to protect the Company and its unaffiliated common shareholders:

• Remove Watsa from his position on the CNG Committee and recommend that shareholders withhold their votes from the reelection of Watsa, whose interests are materially adverse to those of the Company's unaffiliated shareholders;
• To the extent that Watsa remains on the Board after the annual meeting, appoint a special committee (excluding Watsa) of truly independent directors, who do not have a history of acquiescing to Watsa's and Fairfax's interests, to oversee the announced consideration of strategic alternatives;³
• Implement a shareholder rights plan or other defensive measures to protect minority shareholders from an unfair buyout or take-private transaction; and
• Dismiss Morgan Stanley from any role in advising the Board regarding strategic alternatives or any proposed buyout or take-private transactions, particularly any such transactions involving Fairfax or any of its affiliates.

     BlackBerry is on the verge of realizing its tremendous potential and return to profitability.  We are counting on independent directors to protect our interests.

                                                            Very truly yours,
                                                            /s/ Dorsey R. Gardner

¹ But for my advocacy before the TSX, Fairfax would have acquired an even greater, 20%-plus, control stake in the Company at a lowball price.

² Watsa's endorsement of and partnership with David Sokol to lead the Atlas take-private also demonstrates Watsa's questionable judgment as a fiduciary given the suspicious circumstances surrounding Sokol's departure from Berkshire Hathaway, after an audit committee reported that Sokol violated company standards by purchasing $10 million worth of Lubrizol shares before pitching the acquisition of Lubrizol to Warren Buffett. Watsa's questionable judgment and his propensity to place Fairfax's interests ahead of his fiduciary duties to other companies and their shareholders caution that the Board should remove Watsa from positions of influence.

³ This may require the retention of new independent directors to serve on this special committee given the Board's history of acquiescing to unfair transactions with Fairfax, such as the Fairfax Debentures, which calls into question the independence of the current Board members.

SOURCE Dorsey Gardner

Dorsey Gardner, [email protected]