Thursday, April 30, 2015

Dimensional Fund Advisors Sends Warning to Directors Who Support Poison Pills

Big fund firm blacklists directors who support poison pills

13 hours ago
By Jessica Toonkel
NEW YORK, April 29 (Reuters) - A major funds company is putting directors on notice: if you adopt poison pill anti-takeover measures without shareholder approval, you will be blacklisted.
Since October, Dimensional Fund Advisors, the eighth largest U.S. mutual fund firm with $398 billion in assets, has been sending warning letters to companies whose stock it owns and who have adopted the measures without shareholder approval.
In the letters, the Austin, Texas-based money manager warns that it will vote against directors who approved those measures - not just at the company with the poison pills, but at every company they serve - unless they remove those pills or put them up for shareholder vote. The campaign, which hasn't been previously reported, will eventually target 250 companies.
DFA is worried that companies too often use the measures to deter acquirers and shareholder activists who could benefit shareholders, said Joseph Chi, the firm's co-head of portfolio management.
DFA appears to be the first major fund group to blacklist individual directors across its portfolios for such conduct. That may be a sign parts of the funds industry are taking a tougher line against boards who don't do what the funds want. Some of the largest U.S. fund managers have also recently been pressuring companies to make it easier for shareholders to nominate board candidates.
The measures DFA opposes can include pills which allow other shareholders the right to buy shares at a discount if one investor buys more than a certain amount of the company. Another example would be a pill that gives shareholders of a company being acquired the right to buy shares in the combined company after a takeover, again at a discount. These kinds of measures act as a disincentive to anyone seeking to buy a company by making it more difficult and by raising the costs of any deal.
While DFA has had the policy as part of its corporate governance stance since 2012, until now the firm has allowed exceptions primarily because companies said they were not aware of it, Chi said. After sending the letters it is pursuing the policy more aggressively with individual directors, he said.
Chi declined to say how many directors DFA has voted against so far. He said 10 companies have agreed to remove their pills or let them expire since they received the letters, though he declined to identify them.
"It is a very strong stance by DFA," said Aeisha Mastagni, investment officer at the California State Teachers' Retirement System (CalSTRS), the second largest U.S. pension fund, which has also opposed poison pills but hasn't put such a target on individuals.

DFA is taking aim at companies with any type of poison pill that was brought in without shareholder approval. The one exception is if a measure is designed as a tax maneuver to protect tax benefits generated by net operating losses.

The firm's tactic could impact scores of small and mid-sized firms in Dimensional portfolios that have poison pills in place, said Brandon Rees, deputy director of the Office of Investment of the labor union umbrella group AFL-CIO.
DFA owns shares in 170 of the 185 Russell 3000 companies with poison pills that DFA objects to, according to an analysis conducted by Lipper of ISS Quickscore data.
In the past year, at least one company, communications products company Sonus Networks, has removed its poison pill after DFA targeted one of its directors at another company where she served on the board. DFA had a 3 percent Sonus stake as of December 31, according to Thomson Reuters data.
In February 2014, DFA voted against Beatriz Infante on the board of Emulex Corp, a Costa Mesa, California-based network connectivity provider, where DFA is the third biggest shareholder. That was eight months after Sonus extended a poison pill that had been set to expire.
In September 2014, Sonus announced it was removing its poison pill a year ahead of schedule. There is no evidence that DFA's stance resulted in Sonus' decision to get rid of the pill early.
Chi declined to comment on specific companies it has targeted. A Sonus spokeswoman declined to comment. Infante did not return calls.
Companies that could be affected by DFA's stronger stance include Spartan Motors, a builder of specialty vehicles, where DFA is the third largest shareholder, and managed care provider Health Net Inc, where it is fifth biggest, according to Thomson Reuters data.
Both firms have active poison pills adopted without shareholder approval and directors that serve on multiple boards. For example, Hugh Sloan is chairman of Spartan and is on the board of Manulife Financial. Health Net director Mary Anne Citrino is on the board of retailer Dollar Tree Inc. Spokesmen for Health Net and Spartan said their directors were not available for comment.
Health Net's board will discuss DFA's letter at its next meeting, a spokesman said. The company's poison pill is set to expire in July 2016.
A spokesman for Spartan Motors said the company had not received the letter yet and declined to comment further.
Not everyone thinks DFA's personal arm twisting will intimidate directors.
"I can't imagine other investors will say 'I am going to vote against this director even though I like what they are doing at this company,'" said Jack Schuler, who is on the board of a number of publicly traded healthcare companies, none of which are being targeted by DFA.
Investors on occasion target individual directors - sometimes referring to them as "no fly" directors - but it is unusual to see a company do it so systematically, said Patrick McGurn, special counsel for proxy adviser Institutional Shareholder Services.
At CalSTRS, Mastagni said she thinks DFA's tactic could backfire by inadvertently targeting those who are privately fighting against poor corporate governance measures like the poison pills. "They could be the ones in there asking the tough questions," she said.
(Reporting By Jessica Toonkel; additional reporting by Ross Kerber in Boston and Nadia Damouni in New York; Editing by Linda Stern and Martin Howell)