June 21, 2013

Digging Into Nabors Industries’ Governance Failures

Recently, I blogged not only that Nabor Industries had failed to gain majority support on its say-on-pay for three years in a row – but two comp committee members also failed to receive majority support and tendered their resignations, which were not accepted by the board. And as noted in this WSJ article, the company engaged in some shady vote counting on its proxy access proposal. Here is a Forbes article from Paul Hodgson on this situation.

Here’s ten cents from inspector of elections Carl Hagberg: “Further to the good advice of “looking harder” at Charter and By Law or Bye Law provisions, look at my “Primer” on tabulating and reporting voting outcomes. A major problem in recent years has to do with the perfectly awful language that’s snuck into so many proxy statements along the way – and which has been mindlessly copied by brain-dead &/or lazy-bones drafters – is the statement that non votes – and abstentions – count (or, slightly better) “have the same effect as Votes NO.” This is sort of correct – to the extent that they take votes away from the pool of votes that must vote YES in order to PASS…or (more correctly, to “approve” a proposal, since, unless it’s a binding by-law proposal it’s the Directors who must officially “pass it” …But clearly, they can not be COUNTED in the total of Votes NO….since they are NOT.”

And another member notes: “Nabors has about 9% of their outstanding shares as treasury stock. If those shares are held by a subsidiary, under Bermuda law, they can actually vote those shares in favor of management’s proposals, as noted in this article. If that is the case (and it is unclear where the treasury shares are held), the vote may have even been worse than it appears.”

Voting Counting: How to Interpret Bermuda Law

Here’s one reaction that I received from a member:

It is tough to defend a lot of what Nabors has done, and I think their investor relations person may well have the toughest job in America. Nevertheless, Nabors has said that it has counted its votes in “very strict conformance” with Bermuda law, and there does seem to be at least some uncertainty among Bermuda issuers about how non-votes should be treated. Perhaps more importantly, there also appears to be language in Nabors’ charter documents that it can point to in support of the way it handled broker non-votes this year.

For an example of the uncertainty among Bermuda corporations about how to treat non-votes, take a look at a company called Lazard Ltd. Lazard has a provision in its Bye-laws (that’s how they spell it in Bermuda) on voting that is similar to the language included in Nabors’ Bye-laws.

– Section 1701 of Lazard’s Bye-laws says that “Except as otherwise provided by the Act or these Bye-Laws, in all matters other than the election of Directors, the affirmative vote of a majority of the combined voting power of all of the Shares present in person or represented by proxy at the meeting and entitled to vote on the matter, voting together as a single class, shall be the act of the Shareholders.”

– Section 22 of Nabors’ Bye-laws says that “Except as may otherwise be provided for in these Bye-laws, and subject to Applicable Law, at each meeting of Shareholders if there shall be a quorum, the affirmative vote of the holders of a majority of Shares present in person or represented by proxy and entitled to vote thereat, shall decide all matters brought before such meeting.”

Until recently, Lazard interpreted Bermuda law in exactly the way that Nabors now does, but changed that interpretation in 2012. See page 2 of the 2011 proxy statement (non-votes count as “no” votes) v. page 2 of the 2012 proxy statement (non-votes don’t even count as being present at the meeting). Nabors appears to have changed the way it interprets Bermuda law and its bylaws as well, but in the exact opposite direction. In its 2012 proxy statement, it said that non-votes wouldn’t count on the one proposal (ratification of its auditor) requiring the approval of a majority of the shares present or represented by proxy and entitled to vote thereon. In this year’s proxy statement, Nabors said that a broker non-vote would count as a no vote on all proposals requiring this level of approval.

What Nabors may be hanging its hat on for this interpretation is the language in its Bye-laws that I highlighted. Instead of speaking in terms of the votes of a majority of shares “entitled to vote on the matter,” as a company like Lazard does, Nabors’ Bye-laws say that matters presented to shareholders generally must receive the approval of a majority of the shares “entitled to vote thereat,” which they may interpret to mean “entitled to vote at the meeting.” They may be taking the position that these non-voted shares are present and entitled to vote at the meeting, and therefore it is appropriate to take them into account in determining the outcome of all matters presented at the meeting, regardless of whether they are non-voted on a particular matter.

Nabors’ spokesperson said that there was “no intentional change” in the way that it tallied non-votes. With all due respect, that just can’t be right. Some sentient being somewhere made a decision that the company would treat non-votes differently than it had in the past, since the disclosures in its 2012 proxy statement about that issue are just not consistent with the ones it included in this year’s filing. The timing is pretty suspicious and the optics are downright horrible – but on the other hand, if I knew that my company was facing a contentious annual meeting, I think I’d take a very hard look at all my proxy disclosures, and make sure that I was comfortable that we were doing things correctly, including tallying the vote in accordance with applicable law and charter provisions.

By the way, if would like to finance my investigation, I would be happy to go to Bermuda and personally get to the bottom of this for you. I can’t imagine it would take much more than three or four weeks. Among other things, I would need a cigarette boat and several cases of Goslings rum in order to properly investigate the situation. Just let me know and I’ll be on the next plane.

More Voting Counting: How to Interpret Bermuda Law

Here’s another reaction that I received from a member:

Having looked at 2012 Nabors proxy, it appears a change has been quietly made. The weird thing is that it’s a change from a rather odd interpretation to a more logical one. (I tried to verify this switch by looking at Nabors’ Item 5.07 8-K from last year, hoping that it would show how they actually counted the votes. Unfortunately, the company merely gave raw numbers and not percentages, so it’s impossible to be sure how they ultimately decided to count the votes last year.)

According to the company’s 2012 proxy, they counted (i) abstentions, (ii)”withheld votes” (essentially, votes against directors) and (iii) broker non-votes (BNVs) as being “present” for purposes of establishing a quorum. Arguably inconsistent with this analysis, however, they state that BNVs “will not affect the outcome” of the vote. The only way this could have been true was if they were not counting BNVs as shares “present” for voting purposes. Thus, they were excluding BNVs from the denominator when determining whether a proposal received a majority of votes “present.” It does not seem that this approach was even remotely mandated by their bye-laws, however, and certainly not by Bermuda law.

Obviously, the company feared that, had it stayed the course this year a number of shareholder proposals that management opposed would have passed, so in 2013 they seem to have opportunistically begun to count BNVs as “present” for voting purposes as well, with the (much desired) consequence of bumping up the denominator. The odd thing is that this new – and arguably manipulative – method seems more logical than the old one was. I mean, if BNV shares are deemed “present” for quorum purposes, shouldn’t they be “present” for voting purposes as well? Also, if you “abstain” from voting on an item and your shares are still counted as “present” at the meeting, isn’t it even more logical that having your shares actually voted “FOR” or “AGAINST”- even if by an uninstructed agent with discretion – means that they are “present” at the meeting?

One could argue both ways, of course, as to how much conscious participation is really needed to make one’s shares “present,” but it’s hard to say that counting BNVs as present for voting purposes is clearly wrong. It’s even harder – frankly impossible – to say that it violates their bye-laws or Bermuda law.

While it does look like a desperate move by a management feeling “cornered” – and thus may not “pass the smell test” – I don’t think that what Nabors has done can be attacked as illegal or a violation of charter provisions. Also, while the company didn’t exactly say in 2013 “for this year, we’re completely changing the way we count your votes” – it also expressly disclosed how it intended to handle things, without pointing out the change.

Ricky, The Honey Badger: Summer Solstice!

Last week, I blogged about Randall, the Honey Badger at NIRI’s Conference and how my wife said “we need that.” I found Randall’s brother – Ricky – and we have adopted him. Here he is enjoying the summer solstice:


– Broc Romanek