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A Clever Way to Pursue Shareholder Proposals
We confess we have little experience with shareholder proposals, the precatory ESG resolutions that mounted in recent years. As it happens, this year for the first time we submitted one on director say-on-pay to about ten or so companies. We'll explain this in a future post.
Anyway, pursuing one of these at a portfolio company is a medium-to-enormous hassle, as many followers here know well. We recently learned of a resourceful activist that figured out how to overcome some of the obstacles that companies put up to not only winning support, but to also even getting it on the AGM agenda and in proxy materials.
The United Mine Workers submitted five proposals to Warrior Met Coal (HCC), including four on various corp gov matters (shareholder approval of poison pills, blank-check preferred stock, golden parachutes, and proxy access), and one on assessing labor relations. HCC included all five in its proxy materials, so shareholders will vote on all of them. HCC even endorsed the proxy access proposal.
The SEC permits companies to limit a shareholder to one proposal. It allows companies to reject proposals on a wide range of grounds ("ordinary business", "violates laws", etc.). It looks like HCC didn't or couldn't reject the UMW proposals through the onerous no-action letter process. UMW even asserted control over the proposals that it otherwise would not have. What's going on?
UMW bypassed the entire shareholder proposal process (SEC Rule 14a-8), which only two activists seem to have done in the past couple of decades. Instead, it will solicit proxies itself, as if it nominated director candidates. It will do so at a relatively low cost, maneuvering HCC into an interesting corner. And, the new universal proxy card (UPC) made all this feasible.
14a-4, not 14a-8
SEC Rule 14a-4 prescribes how companies and activists solicit proxies from shareholders. Activists usually do so only when they compete for BoD seats. Yet, 14a-4 applies to shareholder proposals, too.
UMW will not rely on HCC to distribute proxy materials to shareholders for its five proposals. Instead, UMW will itself send those materials to shareholders. It drafted proxy materials with its case for the five proposals, filed them with the SEC, hired a vendor to collect proxies (apparently not a proxy solicitor, though), and will distribute proxy materials using notice-and-access. It committed to soliciting shareholders representing a majority of HCC voting power, pursuant to SEC rules (Rule 14a-4(c)(2)). It will then collect its own proxy cards from shareholders, counting votes itself. It estimates this effort will cost $15,000, not much at all.
Thus, shareholders submit proxy cards to UMW, instead of to HCC. Shareholders can also vote for incumbent directors and the routine HCC proposals (say-on-pay and auditor appointment) on the UMW card.
HCC in a corner
UMW basically forced HCC to include all five proposals on the company proxy materials. Shareholders will now vote using either the HCC or the UMW proxy card. And, UMW grabbed some control over the solicitation process.
UMW demonstrated a credible solicitation effort with its own proxy materials. HCC surmised enough shareholders will agree with UMW to submit a proxy card to UMW, not to HCC. HCC won't see how those shareholder vote, including how much they support the UMW and HCC proposals. HCC can't track how those shareholders vote for directors.
If UMW collects enough proxy cards, then HCC won't even know if it has a quorum for the AGM. UMW could control whether the AGM even convenes.
If HCC wants to see as many proxy cards as possible, then it needs to accommodate shareholders that could support the UMW. It thus includes the UMW proposals in the company proxy materials. It need not include the UMW supporting statements, nor does UMW include the HCC opposition statements.
UPC makes it possible
UPC changed an important part of the proxy solicitation rules, the "bona fide nominee" rule. Before UPC, an activist needed consent from a company's incumbent directors to include their names on the activist's proxy card. UPC eliminated that rule, to allow companies and activists in a contested board election to include the others' nominees on their own proxy cards.
Yet, this change applies to all proxy solicitations, not just contested board elections. In this solicitation, UMW can now include the company incumbents, allowing shareholders to vote for them if they want. Without the chance to vote on those incumbents, shareholders might otherwise ignore the UMW proxy card.
UMW specifically said it will not solicit proxies for directors. Thus, it need not solicit shareholders representing two-thirds of HCC voting power, as UPC requires for director elections. It needs to solicit only a majority of voting power, pursuant to Rule 14a-4(c)(2).
Other advantages
This approach helps an activist like UMW in several ways.
- Of course, it allows an activist to submit more than one proposal, as UMW submitted five of them
- The company cannot exclude proposals on one of the numerous bases that the SEC allows, such as "ordinary business" or "violates laws".
- The 500-word limit on a 14a-8 proposal does not apply, so an activist can make whatever case it wants for its proposals.
- An activist may control monitoring proxy votes and even whether a company has a quorum for the AGM.
UMW looks like it will spend a relatively modest amount ($15,000 plus some attorney fees) to accomplish this. As noted above, it needs to solicit shareholders representing 50% of the voting power in HCC. BlackRock and Vanguard together account for 25%, and the top ten institutions account for almost 50%. UMW can likely meet the minimum solicitation by contacting a dozen or so shareholders. HCC will take care of the rest, since it will publish the proposals in the company proxy materials.
UMW has some flexibility, too. It can solicit a large number of shareholders itself, and hustle to collect and compile their proxy cards. Or, it can let HCC do all of that. For the former, it controls the proxies. It can even electioneer the process: contact shareholders as they submit cards, to persuade ones that support only some of their five proposals to change votes. For the latter, UMW saves the cost of chasing down shareholders who vote on the HCC proxy card.
We found only two previous examples of this. The AFL-CIO (the nominal shareholder for UMW-HCC) solicited proxies for an exec comp proposal at Pinnacle Entertainment in 2010. For the Pinnacle directors, it indicated it would vote "for all nominees" without naming individuals, presumably to avoid the bona fide nominee rule. Pinnacle included the proposal in its proxy materials. The proposal won about 43% of the votes cast.
Amalgamated Bank also solicited proxies for a proposal on options backdating at CVS in 2007. Amalgamated didn't mention how it would vote for CVS directors, so it solicited proxies only for its single proposal. CVS also included the proposal in its proxy materials. Interestingly, Amalgamated originally submitted four corp gov proposals. CVS quickly amended its bylaws and otherwise adopted reforms pertaining to three of them, leaving only the options backdating proposal. That proposal won about 48% of the votes cast.
If these two distant examples provide any guidance, HCC may want to get ahead of UMW on these proposals. It already supports one of them, on proxy access. Proxy advisors will likely recommend investors support at least all of the corp gov changes, and possibly the labor relations proposal. With all of them appearing on the company proxy, they should do at least as well as the ones at Pinnacle and CVS.
We admire this, a novel way to gain some of the leverage in an inherently unfair structure and process. Activists of all types should consider this in their efforts.
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