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Does Proxy Access Allows Activists to “Gang Up” Up On Boards?

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A recent note from FactSet Insight highlights that proxy access rules are more and more frequently being used by “wolf packs” of shareholder activists to gain control of corporate boards.

FactSet Account Executive Anthony Garcia explains how this can work. “But proxy access may be much more than another checkbox on the shareholder rights scorecard. It is a wolf in sheep’s clothing. General acceptance of proxy access could allow activists to pool resources, ally with institutional investors, and take over entire boards in a single year and without the warning of even a single 13D.”

Firms typically resist efforts for proxy access…with good reason

Of note, corporations have generally resisted shareholder demands for proxy access that allow holders of a certain ownership level for a certain time period to be permitted to include their own director nominations on the corporate proxy. Garcia notes that 18 companies have recently submitted no-action letters to the SEC to prevent  shareholder proposals for proxy access.

However, he also worryingly points out that: “The SEC announced on January 16, 2015 that, after direction from Chair Mary Jo White to review the application of Rule 14a-8(i)(9), the Division of Corporate Finance would no longer express any views (either granting or denying no-action requests) for the 2015 proxy season under this exception.”

How activist “wolfpacks” work

proxy wolf packs2

Garcia explains how activists can work together to form “wolfpacks” that can gain control of corporate boards. Proxy access demands from shareholders are typically calibrated to a standard 3% ownership level held for three years prior to the submission of a nominee to be included on the corporate proxy. In most cases, nominations are only possible for 10-25% of the eligible director seats, or a minimum number of seats depending on the size of the BoD.

Moreover, he notes that the boilerplate language of most proposals “lends itself to the interpretation that any eligible shareholder may submit nominations and, thus, multiple eligible shareholders may submit nominations.” This means that if multiple shareholders all nominate different directors and all those directors appear on the corporate proxy voting card, then shareholders could vote for a board of shareholder proposed directors above the stated nominee proportion, up to and including all of the board seats.

The company can try to limit activists to a single slate of nominees, but the standard proxy access proposal differentiates between the shareholder or group (“nominator”) and the candidates (“shareholder-nominated candidates”) and there is no SEC guidance otherwise.

Garcia points out the SEC’s tight standards for the “group” requirement have allowed multiple activists to unofficially participate in a campaign without formal group recognition. He notes that: “Given that past court cases concluded that investors offering a joint slate of directors was not sufficient to make them a “group,” it is unlikely that independent 3% owners each offering its own slate of directors would be given a group designation limiting the shareholder-nominated candidates collectively to the specified percentage of eligible director seats.”

FactSet has analyzed 46 campaigns going back as far as 2003 that involved multiple parties but no 13D filer—whether individually or as a group (ie, wolfpack campaigns). The activists sought at least one board seat in 34 cases, and they succeeded in 14 campaigns. Of interest, in six of the 14 campaigns, the activist tried for  multiple board seats and won all of the seats. Factset notes “SharkWatch 50 activists with over 10 campaigns either as part of a group or in a multi-party campaign include: Barington Companies Investors LLC (26); Bulldog Investors LLC (15); Lone Star Value Management, LCC (11); Starboard Value LP (24); Steel Partners, LLC (13); and Western Investment LLC (37).”

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