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Bowne Seminar on Shareholder Activism
 

Bowne Seminar on Shareholder Activism

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  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.
  • Thanks for coming Blurred lines between roles of IR and Corp Secy office Humpty Dumpty has fallen – who will put him together again?
  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.
  • EXPECT ACTIVIST INVESTORS TO HAVE THOROUGH ANALYSIS DONE BEFORE APPROACHING THE COMPANY BE RESPONSIVE TO ACTIVIST INVESTORS, JUST AS WITH OTHERS. DUCK AND COVER IS NOT AN OPTION. EXPECT NEGOTIATIONS FOR BOARD SEATS WELL IN ADVANCE OF FORMAL, PUBLIC PROXY CONTEST.
  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.
  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.
  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.
  • Talk about broker discretion on first two (since they would likely be the only way to get them removed). Substitution of NYSE definition of “good” corporate governance against others. Green proposal – greenhouse gas emissions, basically Poison pill – not only redeem, but even in absence of pill may lead to shareholder proposal to promise never to put one in without shareholder approval.

Bowne Seminar on Shareholder Activism Bowne Seminar on Shareholder Activism Presentation Transcript

  • Shareholder Activism Bowne SEC Issues Update Seminar November 19, 2009 Art Hall, Calfee, Halter & Griswold LLP (Moderator) John Ferguson, Morrow & Co., LLC Keith Mabee, Dix & Eaton Kris Spreen, Calfee, Halter & Griswold LLP
  • Shareholder Activism All encompassing term covering proxy contests, withhold campaigns, shareholder proposals, 13D filings, pressure from institutions, negotiations, lobbying for legislation. Over the past 25 years, the playing field has changed dramatically. Regulation, mechanics and the shareholder environment have changed to benefit corporate governance activists and opposition groups in contests .
  • Activists Benefit From 25 Years Of An Evolving Landscape
    • Institutional Sponsorship of the Corporate Governance Movement
    • *CalPERS initiates Corporate Governance Reform Program 1984
    • *Council of Institutional Investors founded 1985 *ISS founded 1985
    • Department of Labor issues Avon Letter 1988
    • Rise of Institutional Ownership from under 50% to over 75% in past 20 years
    • SEC Proxy Amendments of 1992
    • * Less constraint on oral communications
    • * Elimination of pre–filing requirement for shareholder letters .
    • *The Short Slate Rule
    • Use of Internet and Websites for Proxy Communications.
    • EDGAR System/ www.sec.gov (continued)
  • Activists Benefit From 25 Years Of An Evolving Landscape
    • The Age of Accountability - Corporate Governance Activists Help Dismantle Takeover Defenses
    • *De-Staggering the Board
    • *Rescinding the Poison Pill
    • *Enabling Shareholder Meetings to be called by holders of 10-25% of stock
    • *Eliminating supermajority provisions
    • *Implementing Majority Voting
    • Increasing Influence of Institutional Advisory Firms
    • Consolidation of street-name holdings under one roof at ADP / Broadridge; Internet and Telephone Voting
    • Management Scandals raise questions about board effectiveness
    • Mutual Fund Voting Disclosure
    • Notice and Access
    • Erosion of the “Discretionary Vote”
    • Widespread proxy contest settlements put dissident nominees on dozens of boards
  • Activists Continue to Benefit with Pending Legislation and Potential SEC Action
    • Elimination of Broker Discretionary vote – occurring 1/1/10
    • Say on Pay
    • Proxy Access
    • Exchange Act Rule 14a­2(b)(1) Modification – Not a form or revocation if dissident sends out management’s proxy card
      • Access
      • Just Vote No Campaigns
      • Shareholder proposals
    • Staff Legal Bulletin No. 14E (CF) – more shareholder proposals
  • 2010 Proxy Season In many cases, adopting “best practices” or improving one’s governance profile will win a board favor among governance activists and advisory firms, but may result in a company becoming more vulnerable to a takeover in a depressed market. On the other hand, ignoring the policies of major institutions and advisory firms such as RiskMetrics/ ISS on various governance matters can bring about a substantial “withhold” vote and shareholder backlash that will make a company more vulnerable to future shareholder activism, including a proxy contest.   Boards and their advisors will be faced with many strategic decisions in dealing with key governance issues and takeover threats in the current environment.
  • No Discretionary Voting in Director Elections Now is the time to evaluate your Board’s exposure, consider solicitation strategies, develop relationships and educate directors. Is RiskMetrics an activist organization? 2009 RiskMetrics Director Recommendation Stats (as of Sep. 16, 2009) # of Total Nominees # of RMG Rec Withhold/Against % of RMG Rec. Withhold/Against 24663 5419 21.97% # of Total US Co. # of Co. That RMG Rec. Withhold/Against Their Nominees) % of Co. That RMG Rec. Withhold/Against Their Nominees) 4554 1954 42.91%
  • Elimination Of Broker Discretionary Vote
    • Every Director election is now a potential challenge, whether or not an activist shareholder is coalescing opposition – the system itself is now structured to facilitate an activist agenda even without a specific catalyst.
      • Proxy fights cheaper
      • Just vote no campaigns more successful
    • Depending on the retail percentage in your company, the turnout in your director election could be anywhere from 5% to 50% less. Institutional influence will be magnified. Companies MUST know how this change will impact turnout.
      • Majority voting, declassified board implications obvious
    • Companies without majority voting that ignore causes of high withhold or majority withhold votes will be more vulnerable to shareholder activism.
      • Hundreds of Directors will receive majority withhold votes
    • Reacting to shareholder activism is far less effective than proactively addressing issues and engaging investors before activism takes hold.
  • Shareholder Activism Bowne Securities Conference The Crowne Plaza, Cleveland November 19, 2009 Keith V. Mabee Vice Chairman, Dix & Eaton
  • Proactive Investor Relations/Financial Communications What To Emphasize In Today’s Environment
    • Clarify your company’s value proposition as an investment by emphasizing and properly articulating:
      • Corporate growth and capital allocation strategy
      • Value drivers behind results and future “desired state”
      • Targeted financial and operational performance metrics
      • Distinctive tangible and intangible assets: what sets your “investible story” apart
      • Consistent and credible transparency/disclosure
      • Proactive corporate governance policies and practices
    • Build and maintain good relationships with key media; investment community, proxy governance firms, regulatory agencies
    • Recent research studies of buy-side analysts suggest that effective IR programs contribute a median premium of 10 percent to valuation, while ineffective IR programs are thought to cost a median discount of 15 percent to valuation, and intangibles can account for 30 – 50 percent of valuation
  • What Attracts Shareholder Activists To A Company
    • Governance
      • Inadequate board composition, limited independence from management, insufficient attention to shareholder proposals or investor concerns, a history of reporting, accounting and/or governance issues, excessive compensation
    • Management
      • Diminished investor confidence, remaining in power despite operational issues or lack of strategic direction
    • Ownership
      • Heavy institutional concentrations, limited insider ownership, large founding family holdings potentially looking for exit
    • Financial/Operational
      • High cash balance, stable cash flow, low debt levels, low book-to-market ratio, underperforming line(s) of business, underutilized assets; ‘fuzzy’ strategy
    • Triggering Events
      • Restructurings, cyclical downturns, change in CEO/Chairman/Board, public/investor vulnerability by association, poor Corporate Library or Risk Metrics/ISS ratings, etc.
  • Shareholder Proposals – A Daunting New World
    • Recent changes tip the balance away from management to shareholders, directors are much more at risk of not getting reelected
    • Undertake an annual governance audit of Board and corporate-wide policies/practices
    • Seek regular feedback from institutional investors on corporate governance policies/issues
    • Meet with institutional compliance officers early on to communicate management proposals/changes in policies and to address shareholder proposals
    • Pay attention to and address governance trends before they manifest into a shareholder proposal for your company
  • Activist Hedge Funds At Work What To Expect If You Are Targeted By An Activist
    • Pre market meltdown - Communication of proposals intended to enhance shareholder value
      • Board Presence (49%)
      • Sale of Company or Assets (44%)
      • New Management Team (21%)
      • Share Repurchase (20%)
      • M&A Bid (9%)
      • Elimination of Defense Mechanisms (8%)
      • Special Dividend (6%)
    • Use of aggressive actions until a settlement is reached with the company or the proposal is contested through a proxy solicitation
    • Going public with letters to the Board, progressive SEC filings, rumor mongering, press releases/story placements, promoting churn in the stock
    • Note: Research obtained from Morgan Joseph
  • Tactical Planning and Execution How To Prepare For A Shareholder Activist Campaign
    • Establish a team of relevant outside advisors: legal and IR/PR counsel, proxy firm, financial advisor
    • Develop a contingency communications plan
    • Identify and be aware of triggering events
    • Actively monitor shareholder base, accumulations, market intelligence
    • Know and understand current shareholder perceptions, motivations
    • Mobilize credible third party testimonials
    • Leverage credibility with investors, media, regulators, communities, employees
    • Be willing to listen and negotiate prudently, when appropriate, to give the Board time to exercise their fiduciary responsibilities fully
  • Shareholder Proposals
  • Shareholder Proposals Submitted Under SEC Rule 14a-8
    • Proposal for inclusion by the company in its proxy statement and on its proxy card
    • Procedural analysis - can it be excluded?
      • Adequate share ownership and holding period; one proposal; 500 words or less; timely submitted
      • Not corrected by shareholder after notice by company
    © Calfee, Halter & Griswold LLP 2009
  • Shareholder Proposals Submitted Under SEC Rule 14a-8
    • Legal analysis - can it be excluded?
      • Improper under state law; substantially implemented; conflict; duplicative; director elections; etc.
    • Seek SEC no-action letter on exclusion
      • Burden on company to show proposal should be excluded
      • Generally must submit at least 80 days before filing definitive proxy materials
    © Calfee, Halter & Griswold LLP 2009
  • Shareholder Proposals Submitted Under SEC Rule 14a-8
    • If proposal is included:
      • Company must include shareholder’s proposal and supporting statement in proxy statement
      • Company can include a statement in opposition; must be provided to shareholder in advance of mailing proxy
      • Shareholder or representative must appear at meeting to present proposal
    © Calfee, Halter & Griswold LLP 2009
  • Legal Analysis of Shareholder Proposals Submitted Under Rule 14a-8
    • SEC has generally become less inclined to grant no-action on exclusion requests
    • Ohio companies may face substantive binding proposals
    • Occasionally, additional proxy materials are used by shareholder proponents
    © Calfee, Halter & Griswold LLP 2009
  • Shareholder Proposals - 2009
    • Significant Issues in 2009
      • Say on Pay and other compensation related issues
      • Independent Chairman
      • Call of Special Meeting
      • Adopt Cumulative Voting
      • Declassify the Board, Put Poison Pill to a Vote, Eliminate Super Majority Voting, Adopt Majority Voting in Director Elections
    • Significant Issues in 2010
      • -All of the above
      • -Hold into Retirement, Clawbacks
      • -Succession planning
  • Shareholder Proposal Results :Antitakeover 2008 2009
  • Shareholder Proposal Results: Board and Management Operations 2008 2009
  • Shareholder Proposal Results: Executive Compensation 2008 2009
  • Shareholder Proposal: Social & Environmental 2008 2009
  • Dissident Activism/Proxy Contests
  • Dissident Activism/Proxy Contests
    • Overview
      • No standard roadmap - a very dynamic process
      • Team approach (management, legal, investor relations, proxy solicitor)
    • Defensive Planning/Legal Analysis
      • Review Charter documents and relevant state corporate law for possible points of attack
      • Dissidents may on occasion limit future options by tripping state anti-takeover laws (e.g., Ohio Merger Moratorium Statute)
    © Calfee, Halter & Griswold LLP 2009
  • Dissident Activism/Proxy Contests
    • Possible Activist Tactics
      • Shareholder proposals as method of applying pressure
        • Some short-term holders may not qualify for 14a-8 proposals because of one-year holding period requirement
      • Attempt to call a special meeting of shareholders
        • More ability to control agenda
        • In Ohio, shareholders holding 25% or more (default under Ohio law) may call a special meeting
        • Expanded list of possible agenda items (declassify Board, removal of directors)
      • In limited circumstances, written action of shareholders
      • Proposals from the floor of an Annual Meeting
    © Calfee, Halter & Griswold LLP 2009
  • Dissident Activism/Proxy Contests
    • Special Ohio law considerations
      • Removal of Directors/Declassification of Public Board
        • If classified Board, dissident holders must first seek to declassify Board before seeking removal of Directors (unless for cause)
        • In addition to charter voting standard, requires affirmative vote of holders of a majority of “disinterested shares” (see 1704.01) in order to declassify Board
        • 1701.58(c) provides for additional limitations on removing directors if shareholders have cumulative voting rights
      • Written Actions of Shareholders
        • Generally require 100%
        • Exception: 1701.11 - can amend Code of Regulations by written action of two-thirds of shareholders (or different percentage set forth in the Articles)
    © Calfee, Halter & Griswold LLP 2009
  • Dissident Activism/Proxy Contests
    • Proxy Contests
      • Dueling proxy statements and letters to shareholders (“fight letters”)
        • SEC process - make sure you can substantiate statements
        • Pay close attention to discretionary voting (14a-4(c)) deadline
        • Prepare for possible settlement
      • Special investor relations considerations
      • Solicitation Considerations
        • RiskMetrics process, including split voting issues
        • Impact of proxy access on solicitation process
    © Calfee, Halter & Griswold LLP 2009
  • Additional Planning Items for 2010
    • Consider near-term management objectives in connection with shareholder services/IR posture
    • Legal review
      • Consider pro-active revisions/changes to charter documents:
        • Advance notice provisions
        • Majority voting by-law/Board policy
        • Board declassification
        • Analyze special meeting thresholds
      • Analyze proxy access rules
    © Calfee, Halter & Griswold LLP 2009