Tuesday, February 24, 2009

Director Elections: Don’t Count on the “Routine” Broker Vote

As we approach the 2009 annual meeting season, we are alerting clients to reconsider the impact of changes in “routine” broker voting on corporate director elections. In effect, companies who have not yet adapted to the new proportional voting policies now in use by a number of brokerage firms may find themselves unprepared for the upcoming proxy season. Notably, these proportional or “mirror” voting policies could make electing company-endorsed directors more difficult than ever.

Director elections are one of a number of “routine proposals,” so designated by the New York Stock Exchange under NYSE Rule 452, which call for discretionary voting by brokers as member organizations. Discretionary voting is designed to allow brokers to vote their client’s shares in cases where the broker has not received any instructions from the client or “beneficial owner”. As a matter of course, brokers had always voted these uninstructed shares in favor of the recommendation of the issuer’s board – creating an automatic advantage for proposals recommended by management.

Many brokers (including Schwab, Ameritrade, Morgan Stanley, Merrill Lynch, and Goldman) now allocate unvoted shares in proportion to how their actively voting beneficial owners have instructed votes to be cast. So, for example, if a brokerage firm’s clients have voted 30 percent for a proposal and 70 percent against, the broker now uses its discretion and allocates the unvoted shares in this same proportion. The net result of this change is that retail investors who provide voting instructions to their brokers have an opportunity to disproportionately influence the outcome of a proxy vote – with their votes sometimes effectively counting twice as much.

This opportunity is not lost on organized activists, who - in certain exempt solicitations - can now actively campaign more effectively against directors or Company-sponsored proposals. Instead of being able to count on all uninstructed brokerage shares as votes to be cast for management, companies may find that they need to garner additional votes from other segments of their investor base to ensure their directors win election campaigns. This effect can be outcome determinative for companies who have adopted a majority vote standard for the election of directors.

Tracking this new retail vote influence is of even more importance to companies. Companies may be surprised to see vote support that had been previously expected evaporate as discretionary votes are cast. While all brokers issue instructed votes ten days prior to an annual meeting (as well as discretionary votes if that broker does not vote in a proportional manner), brokers who issue discretionary votes in a proportional manner designate the unvoted shares 72 hours before the annual meeting and then update their votes daily to reflect any new instructions. Although this may seem like very little notice, a good proxy solicitor should be able to estimate the impact of proportional voting approximately a full week to ten days prior to the meeting date.

As a matter of policy, the SEC may discontinue the designation of routine status for director elections within the next two years – meaning that brokers will not vote in the method outlined above. The consequences of the loss of broker votes may impact the ability of a company to achieve a quorum in an uncontested election campaign without an active solicitation. In the meantime, the current broker policies themselves (combined with the volatile markets and heightened corporate governance scrutiny) are reason enough for companies to examine updated solicitation strategies in the new proxy season.

This post was submitted by Bruce Goldfarb, the President & CEO of Okapi Partners, A New York City - based proxy solicitor and experts on issues relating to shareholder activism. We're pleased to have Bruce as one of our newest Blog & Tacklers and look forward to his contributions in the future.

SRZ Legal Alert: Pro-Shareholder Amendments to Delaware General Corporation Law Proposed

Legislation proposing amendments to the Delaware General Corporation Law (the “DGCL”) has been submitted to the Delaware State Bar Association for approval and, if granted, the amendments would be sent to the Delaware General Assembly for approval and then to the Delaware State Governor for signature into law, and would become effective August 1, 2009. The proposed amendments include the creation of two new DGCL sections, Sections 112 and 113, which would permit Delaware corporations to adopt bylaws that would give shareholders access to a company’s proxy statement for purposes of nominating directors as well as requiring the reimbursement of stockholder proxy expenses in certain situations. Along with these new sections, the proposed amendments included changes to Section 213, which would permit Delaware corporations to provide different record dates for stockholders entitled to notice of the annual meeting and stockholders entitled to vote at the meeting.

Click here to read the full publication from SchulteRoth&Zabel.

This Alert was co-authored by one of our Blog and Tacklers, Mark Weingarten, who is a Partner with SRZ and an expert on shareholder activism.

Friday, February 20, 2009

SEC Leaning Toward Giving Shareholders More Say

This article was published in today's Washington Post.

SEC to Examine Boards' Role in Financial Crisis

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, February 20, 2009; D01

Securities and Exchange Commission Chairman Mary Schapiro plans to look into whether the boards of banks and other financial firms conducted effective oversight leading up to the financial crisis, according to SEC officials, part of efforts to intensify scrutiny of the top levels of management and give new powers to shareholders to shape boards.

As she examines what went wrong, Schapiro is also considering asking boards to disclose more about directors' backgrounds and skills, specifically how much they know about managing risk, said the officials, who spoke on condition of anonymity because no policy initiative has been launched.

Having led the agency for just three weeks, Schapiro hasn't had the chance to move forward on these initiatives, though that will probably be one of her first tasks. Schapiro has said that Wall Street must repair itself after the financial crisis and that one way to do so is by "giving shareholders a greater say on who serves on corporate boards, and how company executives are paid."

With few exceptions, boards have received little media attention as the country has sought explanations for financial firms' taking on such perilous risks. These boards -- which typically consist of a dozen or more well-known executives, politicians and other influential people -- were ultimately responsible for the decisions of the Wall Street companies, housing firms and banks at the heart of the crisis.

The boards signed off on the risks the companies took and the compensation packages awarded to top executives. But many corporate watchdogs say the boards of top financial firms had characteristics that promoted risky business practices and harmed shareholders.

"Corporate governance is about managing risk. It's about incentive compensation. It's about corporate strategy and sustainability. And all of those things are what the boards failed to do," said Nell Minow, a co-founder of the Corporate Library and an advocate of reforming corporate boards.

The Obama administration and Congress have already taken steps to limit the type of board behavior that may have contributed to the crisis. The stimulus legislation includes limits on compensation at companies receiving tax dollars as well as provisions that give shareholders an advisory vote on executive compensation, known as "say on pay."

Most boards have committees to oversee risk and compensation, and corporate watchdogs say their biggest failure was allowing executives to be paid in exchange for the quantity of business rather than the quality. This often promoted short-term risk-taking at the expense of long-term gains.

"Management and traders are compensated on booking profits. It didn't take a long time to figure out if you undertake very risky activities, you get higher bonuses," said Ivo Welch, professor of finance and economics at Brown University. "There's nobody to say this is not in the interest of shareholders or the United States overall."

Watchdogs point to flawed boards at many firms -- including Countrywide, American International Group and Wachovia -- involved in the crisis. Minow points out that at Bear Stearns, the compensation committee had nine criteria to decide on the chief executive's compensation, such as total return to shareholders and earnings per share. But in the end, it could choose to award the maximum compensation to the chief executive based on only one of the criteria.

Over five years at Bear Stearns, chief executive James E. Cayne took home $155 million, according to Forbes. A few months after Cayne stepped down as chief, a collapsing Bear Stearns was snapped up by J.P. Morgan in a federally engineered fire sale in which shareholders lost most of their investment.

The Bear Stearns board had other characteristics that corporate governance advocates found problematic. For example, several directors served on the boards of four public companies, raising questions about whether they had the time to oversee a complex financial firm.

During part of the tenure of former Merrill Lynch chief executive E. Stanley O'Neal, who took home $161.5 million as he left the firm, the Wall Street investment bank loaded up on investments derived from subprime mortgages and other risky loans. O'Neal was also chairman of the Merrill board -- meaning he was both the overseen and the overseer.

Watchdogs say the Citigroup board also exhibited poor practices. Three of the firm's directors also were serving as chief executives at other companies.

Other Citigroup directors had multiple roles at the firm. Robert Hernández Ramírez was both a board director and chairman of the bank's Mexican subsidiary. Former Treasury secretary Robert E. Rubin was both a board director and a top adviser to the firm, a role that earned him more than $100 million. Rubin recently retired, and Hernández announced he was stepping down this week, though Citigroup said he would retain access to aircraft on the company's dime.

Some business insiders say that boards shouldn't be held culpable for a financial crisis that just about everyone missed.

"The universe of people who misread the risks in what some of these firms were doing is very broad. You could extend it to the rating agencies, to managements, to regulators," said David Hirschmann, president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

The inquiry into what went wrong at the board level comes as the SEC's Schapiro plans a broader review of policies governing how much shareholders can influence boards. She previously has expressed support for proxy access, which would make it easier for shareholders to propose new directors. Many public companies oppose proxy access, in part because it enables activist shareholders, such as from labor or environmental groups, to try to seek influence on boards.

Schapiro recently hired Kayla J. Gillan, a longtime shareholder advocate, as a senior adviser. Another one of Schapiro's close associates, SEC Commissioner Elisse B. Walter, has also spoken favorably about enhancing shareholders' influence. "To me, the fundamental question is: 'Should shareholders have a real say in determining who will oversee management of the companies that they own?' I believe strongly that the answer is yes," Walter said this week.

Earlier this month, the SEC rejected a request by Birmingham, Ala.-based Regions Financial to ban a shareholder proposal to set strict pay limits at the firm, according to RiskMetrics Group. Just months earlier, the SEC approved a request by SunTrust Banks to ban a similar shareholder proposal.

Some investors aren't convinced the shift is real. Money manager John Harrington tried to propose new board committees at Bank of America, Citigroup and Goldman Sachs that would ensure that the companies take steps to support U.S. economic interests.

Bank of America and Citigroup wrote letters to the SEC asking for permission to disallow the proposal. The SEC told Citigroup it had the authority to do so, Harrington said. "It's shameful that the SEC is still supporting corporate management right down the line," he said.

Posted by Damien Park, CEO Hedge Fund Solutions

Sunday, February 8, 2009

January's Activist Investments - 65 Companies Targeted

Below is a summary list of investments made by shareholder activists during January. This information was extracted from Hedge Fund Solutions' Catalyst Equity Research Report (TM), a free in-depth weekly research on activist investments.

Click Here to subscribe to the FREE report.

Activist Investor
ABVA Alliance Bankshares Corp John Edgemond
AMLN Amylin Pharmaceuticals Carl Icahn; Eastbourne Capital
AVGN Avigen Inc. Biotechnology Value Fund
BIOD Biodel Inc Moab Partners
BKS Barnes & Noble, Inc Yucaipa Companies
CHUX O'Charley's Inc Crescendo Partners
CITZ CFS Bancorp Financial Edge Fund
CLCT Collectors Universe Shamrock Activist Fund
CNBC Center Bancorp Lawrence Seidman
CPWM Cost Plus Inc Stephens Investment Holdings
CRGN CuraGen Corp DellaCamera Capital
CTO Consolidated Tomoka Land Co Wintergreen Advisers
CWLZ Cowlitz Bancorporation Crescent Capital
DFZ R.G. Barry Corporation Mill Road Capital
DITC Ditech Networks Lamassu Holdings
EDCI EDCI Holdings Chapman Capital
ENZN Enzon Pharmaceuticals DellaCamera Capital; Carl Icahn
EPL Energy Partners Wexford Capital
FNHM.OB FNBH Bancorp Andrew Parker
FSBI Fidelity Bancorp Finacial Edge Fund
FSCI Fisher Communications Gamco Investors
FSFG First Savings Financial Group Joseph Stilwell
GET Gaylord Entertainment TRT Holdings
ICGN ICAgen Inc Xmark Opportunity Partners
INFS InFocus Corp Nery Capital Partners
ISH International Shipholding Corporation Liberty Shipping Group
JTX Jackson Hewitt Tax Service Shamrock Activist Value Fund
KANA Kana Software Inc KVO Capital Management
KFS Kingsway Financial Sevices Joseph Stillwell
KONA Kona Grill Mill Road Capital
LAQ The Latin America Equity Fund City of London Investment Management
MGAM Multimedia Games Inc Dolphin Limited Partnership
MIPI Molecular Insight Pharmaceuticals David Barlow
NDD Neuberger Berman Dividend Advantage
Western Investment
NTII Neurobiological Technologies Highland Capital Management
NTMD Nitromed Inc Deerfield Capital Management
OFIX Orthofix Ramius Capital
PIF Insured Municipal Income Fund Inc Bulldog Investors
PPCO PenWest Pharmaceuticals Perceptive Advisors; Tang Capital Partner
PRSC Providence Service Corp 73114 Investments
PRXI Premier Exhibitions, Inc Sellers Capital
QDHC Quadramed Corp BlueLine Capital
RDC Rowan Companies Steel Partners
SLTC Selectica Inc Trilogy
SONS Sonus Networks Legatum Limited
SSE Southern Connecticut Bancorp Lawrence Seidman
SUAI Specialty Underwriters Alliance Hallmark Financial Services
SUG Southern Union Co Sandell Asset Management
SUMT SumTotal Systems Discovery Capital
SUTM.PK Sun Times Media Group Davidson Kempner Partners
TEC Teton Energy Corp First New York Securities
TESS Tessco Technologies Discovery Equity Partners
TIER Tier Technologies Inc Parthenon Capital
TMI TM Entertainment & Media Bulldog Investors
TRGL Toreador Resources Nanes Delorme Partners
TRMA Trico Marine Services Kistefos AS
TUTR Plato Learning Stephen Becker
TWMC TransWorld Entertainment Riley Investment Management
VLCY.PK Voyager Learning Company FoxHill Opportunity
WFMI Whole Foods Market Inc Yucaipa Companies
WMPN.OB William Penn Bancorp Joseph Stilwell
WOC Wilshire Enterprises Bulldog Investors
WRLS Telular Corp Simcoe Partners
YSI U-Store-It Trust Todd Amsdell
ZEP Zep Inc. Gamco

Aggressive Activists Usually Succeed

No one on the corporate side wants to get that confrontational call or letter from a hedge fund or investor demanding a change in management. But a paper by two New York University profs in the February 2009 Journal of Finance concludes shareholder activism works - for shareholders, that is.

The study draws upon 151 hedge fund activist campaigns from 2003 to 2005, plus a second data set of 154 activist efforts spearheaded by individuals, private equity funds, VCs or other asset management groups. All of the campaigns studied involve aggressive calls for change such as gaining seats on the board, replacing the CEO, stopping a merger or pursuing strategic alternatives. Symbolic or minor changes aren’t included.

The authors look at stock price movement around the activists’ declaration of intent in a 13D filing and in the year following, as well as the types of change demanded and achieved.

The results?
  • Stocks of companies targeted by hedge fund activists earn a 10.2% abnormal return in the period around the filing of the 13D. Those facing other kinds of activists outperform by 5.1%.
  • Superior returns persist in the one-year period following the 13D. Hedge fund campaigns deliver an average 11.4% abnormal return after a year, and other activists’ interventions result in 17.8% outperformance.
  • When it comes to getting management to make the proposed changes, aggressive activists are more often successful than not. Hedge funds pushing a confrontational agenda win 60% of the time, and other investors achieve their objectives in 65% of the campaigns. Most commonly, they win board seats by threats of proxy contests.
  • Hedge funds often target more financially healthy companies and often demand cash payouts or share repurchases. Other activists are more likely to focus on changing strategies or spending priorities.
The study doesn’t focus on defensive strategies for companies - just outcomes. Prevention may be the best defense. In a time of depressed equity prices, management and boards should be taking actions (without anyone demanding change) to bolster shareholder value … reducing costs, strengthening the balance sheet, making needed changes in leadership.

Investor relations professionals, I suspect, can help mostly by serving as a timely and outspoken voice to convey shareholder concerns up the line - before anyone declares war through a 13D. Now, more than ever, IR should be listening and providing a conduit to management and the board.

Posted by Dick Johnson, President Johnson Strategic Communications and the author of the investor relations blog IR Cafe.

Sunday, February 1, 2009

Steel Seeks to Dismiss Icahn Suit

Steel Partners is seeking to dismiss a lawsuit filed against them by Carl Icahn. As previously noted on this blog, Icahn is suing Steel claiming the fund failed to properly inform investors before merging into WebFinancial, a publicly-traded company controlled by Steel.

According to a Reuters report, Steel's lawyers requested the dismissal "Because it is so obvious that plaintiff's claim boils down to nothing more than one for an award of $15 million in damages (at the absolute most), plaintiff's motion is so utterly without merit as to be frivolous and worthy of sanctions."

Click Here to view a copy of Steel's investor presentation detailing The WebFinancial Solution.