August 22, 2014

Shareholder Proposals: 10 Things About NY Times’ “Gadflies” Column

A few days ago, the NY Times ran this DealBook column – “Grappling With the Cost of Corporate Gadflies” – by Professor Steven Davidoff Solomon. Here are 10 thoughts that I had right off the bat:

1. Never Use the Loaded “Gadfly” Term – It’s politically incorrect to call someone a “gadfly.” Trust me, it is. Even though the definitions of the term don’t appear to be offensive: “A gadfly is a fly that annoys horses and other livestock, usually a horse-fly or a botfly” or “A gadfly is a person who upsets the status quo by posing upsetting or novel questions.”

2. Gilbert Brothers Brought Rule 14a-8 to Life – Davidoff calls Evelyn Y. Davis the “doyenne of this business” (yes, I had to look up “doyenne” in the dictionary) – but it was the Gilbert Brothers who were the first individual proponents that absolutely dominated the shareholder proposal scene before – and for decades longer – than EYD. In addition, they were the ones responsible for the shareholder proposal rule surviving in court against business interests a few years after the SEC adopted the rule (the Transamerica Corporation case in ’46, frequently referred to as the Magna Carta of the rights of shareholders – see page 221 of my “Shareholder Proposal Handbook“). I will be blogging more about the Gilbert Brothers soon.

3. Most Individual Proponents Don’t Like Being Grouped TogetherJohn Gilbert hated being lumped together with EYD in media articles. They didn’t act in concert.

4. Remarkable That Anyone Bought EYD’s “Highlights & Lowlights” – It’s amazing to me that any company would cave to what is essentially blackmail and buy Evelyn Davis’ “Highlights & Lowlights” – which essentially was a publication about herself. But it was a smart investment for anyone that didn’t want EYD to cause trouble at the annual meeting. Did Ford really give her a Jaguar? (I believe the answer is “no” – just that Bill Ford showed up when the car was delivered. But EYD paid full price.) Not sure if companies would be buying EYD’s newsletter today as I think they would get called out for it in this social media age.

5. What Is a “Successful” Shareholder Proposal? – Davidoff presumes that a shareholder proposal is successful only if it receives majority support from shareholders. But I define it much differently. For the proponent who brought the proposal, the definition of success may vary. They merely might want to force the board to consider the issue of the proposal. They actually might want to use a proposal to gain attention so they can obtain a meeting to discuss a more pressing issue (for which they don’t want to publicly disclose).

For many proposals, obtaining support much below the 50% threshold is considered a “success” as it might force the board to act – look what happens if a say-on-pay vote garners 30% support (ie. ISS-mandated consequences kick in). And remember that shareholder proposals are nonbinding. Companies can – and sometimes do – ignore them even if they obtain majority support.

6. Most Recent Court Cases Have Resulted in Losses for Companies – Davidoff brings up the fact that some companies have sued proponents – but he neglects to mention that companies have tended to lose these cases starting this year.

7. $87 Grand for No-Action Requests? Call My Lawyer – The gist of the Davidoff article is that shareholder proposals are costing companies so much money. Of course, that depends on whether a company decides to seek no-action relief from Corp Fin to exclude them. Davidoff throws out that it costs companies $87,000 per proposal for “dealing with them.” The link to the Chamber of Commerce page cited for this number is dead. So I have no idea what the basis for this number is, but I can pretty safely say it’s way off the mark in my experience. To prepare a typical no-action request, research and writing by outside counsel is probably $20k to $30k. It’s cheaper if it’s done in-house in terms of money laid out – but probably not in terms of resources used. [This Activist Investor blog dug and found the source of this number to be a rudimentary survey from ’97.]

8. No-Action Process Ripe for Reform? – Anyways, if the real beef is cost – why not go to the heart of the matter and reduce the costs inherent in the no-action process? One idea is for the SEC to force companies to use a checklist format when seeking exclusion. That would enable research to be much easier, as well as simplify the drafting of the NOA requests. Not to mention it would make it easier for Corp Fin to process them.

9. Do Institutional Investors Support Proposals From Individual Proponents? – It appears that Davidoff didn’t bother to talk to any institutional investors to ask their opinion about individual proponents. If he did, I can tell you that most would support the right of these shareholders to submit proposals (in fact, EYD was known to pick topics that would receive wide support on purpose). And that institutions have supported their proposals many times over the years. Some of them actually get very concerned about Corporate America railing so hard against the right of retail shareholders to voice their opinion, wondering whether they have something to hide. This tone clearly doesn’t fit in this era of shareholder engagement. [Great quote from The Activist Investor blog: We also object to the idea that companies need to “grapple” with its own investors.]

10. Shouldn’t the Topic of the Proposal Matter, Not Who Submitted It? – Yep. Amen. The article piggybacks off this Manhattan Institute study which dissects which individuals submitted the most proposals compared to other individuals. Not that important a topic IMHO.

There are other issues tackled in – and with – the Davidoff piece:

– There is wacky math throughout the Davidoff piece. He says there were 286 no-action requests over a one-year period. And that they cost $87k each. But when he multiplies those numbers, he says the aggregate cost to companies is $90 million? No idea how that works as my calculator comes up with a number that’s less than a third of that.

This Activist Investor blog highlights that the majority vote rate of the three proponents highlighted in the Davidoff column fits squarely within the average range if the timeline is enlarged to ’06-’14 instead of just calculating that figure for the past year.

And Davidoff points out that 71% of no-action requests are granted – but his denominator is no-action requests – not the # of proposals submitted to companies in total, which is more pertinent to the point he is making in that part of the article (which would lower this percentage to the teens).

– Alter egos continue to be a concern of mine. If someone doesn’t meet the minimum ownership standard in the rule – which is pretty low – they shouldn’t be eligible to submit a proposal. This continues to be a battle with Chevedden.

– In this blog, Jim McRitchie has weighed in with a lengthy rebuttal to the Davidoff piece.

Shareholder Proposals: Need to Rethink Resubmission Thresholds?

The Davidoff column plays up the fact that AutoNation has gotten a proposal from Chevedden for 14 years in a row. So apparently his proposals are garnering more than 10% to satisfy the resubmission thresholds in Rule 14a-8(i)(12). Maybe it is time to rethink the parameters of that exclusion basis. But remember that opening up the shareholder proposal to reform will not solely go the way that most companies want.

There is no more highly contested area of rulemaking than the shareholder proposal rule. It’s been over 15 years since the last rulemaking in this area – and now with social media a factor in campaigns, I can see a rulemaking proposal about shareholder proposals garnering half a million comment letters (nearly all of them in favor of changes that benefit shareholders). Not a reason to avoid rulemaking necessarily – I just want to point out that it’s not as easy as you would think. There typically are trade-offs – if companies get a rule change that benefits them; then shareholders will also get a change that benefits them. So be careful what you wish for. There are very few companies that perhaps are unfairly impacted by the existing resubmission thresholds…

Shareholder Proposals: Evelyn Y. Davis Video

I’ve been dribbling out a series of short videos covering narrow aspects of Rule 14a-8 on Plug “shareholder proposals” into the “search” tool and you will see these 7 videos so far. 8 more to come. Not the best quality but I just read a bunch of books during my vacation about how to make better videos. So they will get better after this series of 15 videos runs (I’ve already taped all 15 – just haven’t posted them all yet). Here’s a 2-minute video about EYD that I posted this morning:

– Broc Romanek