Shareholder Proposals Have A Habit Of Persisting

Updated on

Shareholder proposals, a not-much loved part of corporate democracy, have a habit of persisting.

Get Our Activist Investing Case Study!

Get The Full Activist Investing Study In PDF

See 2017 Hedge Fund Letters.

Last year, Republicans and the U.S. Chamber of Commerce called for the threshold to be raised to 1% of a company’s stock (currently investors owning the lower valued of 1% or $2,000 worth of company stock can submit proposals). Two years before that, the then-chair of the Securities and Exchange Commission (SEC), Mary Jo White, temporarily halted a practice of providing no-action relief letters for companies such as Whole Foods Market that were seeking to replace shareholder proposals on their ballots with more incumbent-friendly reforms, pending further guidance.

The guidance that resulted from that episode has now become the battleground for a new defensive tactic, likely playing on White’s departure from the top job and her replacement by Jay Clayton, who has expressed openness to reform of so-called 14a-8 proposals without picking a side. With successful no-action relief requests hitting a four-year high in the 2017 proxy season, not picking sides already looks tantamount to favoritism.

More concerning than simple reliance on the SEC’s lawyers is a new spate of companies seeking to “game the system,” as one shareholder group has put it. In December, energy company AES responded to a proposal by John Chevedden seeking to lower the threshold for calling a special meeting to 10% of shares by issuing a management proposal unnecessarily ratifying the current 25% threshold. It then applied to the SEC for comfort that the regulator would not demand the inclusion of Chevedden’s proposal on the grounds laid out in 2015’s Staff Legal Bulletin 14H (SLB 14H) following White’s intervention that shareholders could not logically vote for both proposals.

Council for Institutional Investors, a lobby group representing shareholders that was instrumental in overturning the Whole Foods no-action letter, has taken up Chevedden’s cause. It wrote to the director of the Corporate Finance division of the SEC, William Hinman, arguing that companies should have to prove they were considering a proposal on the issue before receiving one from a shareholder. “To do otherwise is to invite game-playing by corporate issuers,” its general counsel wrote.

Chevedden, in an interview and emails with me this week, offered three objections to the practice. First, “It goes against the whole spirit of corporate democracy if you can checkmate a proposal,” he said. Second, campaigners would not lose their voice but would trigger “a heavy dose of a one-sided management argument against the issue” in question, in Chevedden’s words “What a dilemma for a proponent. What a great outcome for a status quo management,” he adds. Third, the practice could spread from governance-related proposals to environmental and social ones, where the stakes are higher, and shareholders already face an uphill climb.

The SEC, to its credit, has already begun asking companies taking advantage of SLB 14H to disclose that they excluded a shareholder proposal and to outline what they would do if their ratification proposals fail (lower the requisition threshold, perhaps?). But I did not receive a response to a question I posed Wednesday as to whether there are any plans to review the guidance.

For now, the matter reinforces the difference between shareholder proponents, often derided as gadflies but influential in the dismantling of takeover defenses over the last couple of decades, and activist investors seeking better access to boards. AES, it might be remembered, struck a deal in January to give activist investor ValueAct Capital Partners a board seat (the deal was announced about six weeks after the no-action request). ValueAct, which is pushing a more environmental, social, and governance-heavy version of activism at the same time as differentiating itself from less management-friendly activists, did not return a request for comment on the Chevedden proposal or AES’ response.
*    *    *
Meanwhile, Chevedden has a new weapon in his corporate governance crusade – a way of communicating directly with shareholders. Having obtained “EDGAR codes” providing access to the SEC’s digital filing service this year, Chevedden has at the time of writing fired off seven statements in support of proposals that will be carried on management proxies. Lawyers at Gibson Dunn, which is representing at least one company against a Chevedden proposal, warned in a blogpost last week that companies may lack a “practical and timely recourse” to correct materially false information. Other shareholder proponents complain that the process is expensive, costing as much as $150 per filing.

Newell Brands sent an unusual letter to Starboard Value this week, emphasizing the extent to which it agreed with the activist’s assessment of its business. Fresh from overhauling its board, replacing nine departing directors with six new ones including four nominated by Carl Icahn, the consumer products rollup is now in full bear-hug mode, emphasizing oversight of its asset sales by Icahn Portfolio Manager Courtney Mather and its commitment to meeting Starboard’s profitability targets. Though Starboard has yet to indicate whether it is thinking of running a minority slate at this year’s annual meeting, Newell thinks it has the bull by the horns. “The new board’s singular focus at this time is devising, articulating and executing the multi-year strategic transformation and operational turnaround that will once again make Newell Brands a best-in-class consumer products company that delivers outstanding returns,” it wrote. “We are pleased to know that this focus is consistent with Starboard’s perspective as well.”

Quote of the week comes from Arcturus, a nano-cap Israel-based but U.S.-listed pharmaceutical company that is waging a rearguard action against its former CEO, Joseph Payne. Early indications are that the proxy fight could be a humdinger – Payne was fired for cause in February, just three months after privately-held Arcturus went public through its acquisition of activist target Alcobra, and has now been sued by the company for breach of fiduciary duties, side-dealing and voting down the approval of the company’s auditors. Payne has yet to respond to the complaint but in a letter issued Wednesday, Arcturus argued that the very act of going public helped uncover these issues:

“By January 2018, the board consisted of a majority of independent directors (although a majority of them were people Payne proposed as directors as part of the ATI/Alcobra merger.) They realized there were significant issues with Payne’s ineffective conduct and performance, including his poor judgment and lack of leadership. At this point, the board learned that Payne was withholding and misrepresenting material information about the company’s collaboration partnerships, and lying to the company, board, our partners and shareholders.”

Article by Activist Insight

Leave a Comment