June 29, 2015
Members of the Board of Directors
181 W. Huntington Drive, Suite 202
Monrovia, CA 91016
Dear Members of the Board,
Up-and-Coming Small- and Mid-cap Portfolio Managers #MICUS (Morningstar Conference)
Engaged Capital, LLC (together with its affiliates, “Engaged Capital” or “we”) has been a shareholder of AeroVironment, Inc. (“AVAV” or the “Company”) and has publicly sought to improve its corporate governance since July 2013.
As you are aware, Engaged Capital submitted a non-binding Rule 14a-8 proposal seeking the declassification of the Company’s Board of Directors (the “Board”) at the 2014 Annual Meeting of Stockholders (the “2014 Annual Meeting”). At the 2014 Annual Meeting, the non-binding declassification proposal passed by a healthy margin with over 70% of votes cast in its favor. More tellingly, the proposal received over 92% support when insiders are excluded from the calculation. Considering the foregoing, it is evident to us that the independent shareholders of AVAV, the true owners of the Company, overwhelmingly support the declassification of the Board.
As such, we believe it is this Board’s responsibility to effect the wishes of its shareholders and take all necessary steps not only to put a binding declassification proposal up for a shareholder vote at the 2015 Annual Meeting of Stockholders (the “2015 Annual Meeting”), but also to actively and vigorously solicit proxies for its approval and ensure that all shares over which officers and directors of AVAV have voting control are voted in favor of the declassification proposal.
In its proxy statement for the 2014 Annual Meeting, the Company committed that “[c]onsistent with its fiduciary duties, if stockholders voted in favor of the proposal, [the] board would reevaluate its position with respect to [its] classified board structure.” The shareholders have spoken and it is time for the Board to reevaluate its position and take the necessary steps to declassify the Board at the 2015 Annual Meeting. To be clear, that means that each director up for election at the 2015 Annual Meeting should be elected to a 1-year term contingent on approval of the declassification proposal.
The declassification process must start at the 2015 Annual Meeting. However, a shareholder-unfriendly provision in the Company’s Amended and Restated Certificate of Incorporation (the “Charter”) imposes a burdensome requirement of a supermajority vote of two-thirds of the outstanding common stock for the approval of a declassification of the Board. By our estimate, given the high voting threshold, the significant number of broker non-votes at the 2014 Annual Meeting, and the large number of shares held by insiders, it is nearly mathematically impossible for a declassification proposal to garner sufficient support for passage without the officers and directors of AVAV voting in its favor. Put differently, the insiders of AVAV can essentially unilaterally defeat the declassification that is clearly widely supported by independent shareholders.
We believe the Board’s choices and actions with regard to the declassification of the Board are an important test of whether the current directors take seriously their duties to further the wishes of the Company’s shareholders. Shareholders have unequivocally shown they believe it is in their best interest that the Board should be declassified. The Board must honor shareholders’ desires and not only place the declassification of the Board on the agenda for the 2015 Annual Meeting but also do everything in its power to facilitate approval of the proposal by actively soliciting proxies in its favor. We have confirmed that a top tier proxy solicitor could be hired by the Company to accomplish this for between $25,000 and $40,000; a small price to pay to ensure that the Company is abiding by its shareholders’ wishes to greatly improve corporate governance at AVAV. In addition, we expect AVAV to provide disclosure in its proxy statement for the 2015 Annual Meeting confirming that all of its directors and officers will vote in favor of the proposal. Anything short of these actions will, in our view, be contrary to the best interests of shareholders and a strong indication that AVAV’s directors have placed their personal interests and individual loyalties above those of shareholders. Engaged Capital intends to continue to closely monitor the situation to ensure that the Board takes the appropriate steps to represent the best interests of ALL shareholders.
Glenn W. Welling
Engaged Capital, LLC