Starboard Goes Precatory

We remain convinced more investors will pursue a new(er) way of pressuring portfolio companies through an innovative shareholder proposal mechanism. Activist investor Starboard Value just this week became the next activist to do this, at News Corp (NWSA).

Starboard will solicit its own proxies for this proposal, the latest proponent and first hedge fund activist to do so. Earlier this year we saw the first such situation in many years, at Warrior Met Coal (HCC). There, the United Mine Workers (UMW) succeeded in winning support for several precatory proposals through its own solicitation.

This week, Starboard disclosed it submitted a precatory proposal to NWSA, requesting it collapse its long-standing dual-class share structure. (The Murdoch family controls 41% of the votes while owning only 14% of the shares.) Starboard will follow the same process as UMW at HCC.

We're intrigued that Starboard wants to do this, as the specific proposal seems doomed to fail. We surmise Starboard has other motives, though. That a prominent investor like Starboard adopts this approach bodes well, too.

A proposal like many others

Investors have of course complained about dual-class structures for a very long time. Numerous shareholders have proposed to eliminate them at many companies. NWSA shareholders even voted in 2016 whether to disband its dual-class structure. Then, almost 90% of the non-Murdoch shares voted in favor, with not quite 50% of all shares supporting. NWSA didn't do anything about its dual-class shares then.

NWSA could ignore the earlier proposal because it was precatory. Shareholders submit hundreds of proposals for voting at AGMs each year. Almost every one of those are merely advisory, urging the company to take one or another course of action: write a report, adopt a goal, or amend governing documents like bylaws. They form the core of ESG activism at AGMs. Why shareholders do it this way, and how companies respond, are subjects for another post. Suffice it to say companies may legally ignore what shareholders vote to support. NWSA did exactly this with the previous dual-class share vote.

A process like only one before it

As far as we can tell, previous shareholder proposals to eliminate dual-class shares were submitted as a proposal for the company to include on its proxy statement. These are also known as 14a-8 proposals, for the relevant SEC rule. Those hundreds of ESG proposals are 14a-8 proposals, including at least a few seeking to eliminate dual-class shares. They all follow the same well-trod path, and relatively few win material support from shareholders.

Instead of a 14a-8 proposal, Starboard will solicit proxies itself. It will follow the same process it would use for BoD elections. There, an activist contacts shareholders, using its own proxy materials and proxy solicitor, to collect votes. It does not rely solely on the company and its proxy materials and proxy solicitor. These are known as 14a-4 proposals, again for the relevant SEC rule.

Any shareholder that wants to elect directors at a company follows 14a-4, happens many times every year. First UMW and now Starboard will use it to promote support for a precatory proposal. A handful of shareholders have done this before, none since 2010.

A proposer unlike others

Starboard has abundant experience with proxy contests and 14a-4. After all, it's the activist that elected an entire new BoD at Darden Restaurants several years ago.

To our knowledge, Starboard has not submitted a shareholder proposal at a portfolio company. Almost all activist funds avoid precatory proposals and the 14a-8 process. We don't expect it or any hedge fund like it to submit ESG proposals anywhere.

We don't quite know why Starboard submitted a precatory proposal at NWSA. We have some ideas why it did so as a 14a-4 proposal rather than a 14a-8 proposal.

We surmise Starboard submitted a precatory proposal because it couldn't submit a binding one. To recapitalize from dual-class to single class takes many steps, changes to numerous governing documents, and approvals from regulators, state domicile officials, and various shareholders. The process needed for shareholders to themselves amend bylaws, the certificate of incorporation, and other governing documents would become much too complicated for an outsider.

Why submit any proposal? Starboard likely thinks it helps increase pressure on the company, especially as a 14a-4 proposal. Even if NWSA ignores a favorable shareholder vote, which they almost certainly would do, it would likely need to explain its decision to irate shareholders.

Why submit a 14a-4 proposal? Starboard might have missed the 14a-8 proposal deadline, which was June 6. Perhaps it decided to submit a proposal only a few weeks ago. It could submit a 14a-4 proposal between July 18 and August 17.

Also, Starboard avoids the hassles of 14a-8 proposals, including getting through the SEC no-action process. It would need to accept the reality of soliciting proxies itself, rather than going on the company proxy statement. Even then, UMW showed a way around that, and how a 14a-4 proposal can pressure a company in unique ways.

At HCC, UMW compelled the company to include five proposals in the company proxy statement. It then needed to solicit many fewer shareholders. Under 14a-8, the company can decide to include only one proposal.

At NWSA, Starboard may simply force the company to negotiate, somehow, over demands to eliminate dual-class shares, or perhaps other unknown demands. You see, if Starboard solicits proxies itself, then it alone knows how a possibly significant percentage of the shareholder base votes. It will have the proxies, and NWSA won't.

NWSA might not risk losing control over counting a portion of the votes. After all, a few years ago most shareholders not named Murdoch voted against the Murdoch family. With some effort Starboard could do even better, and put itself in the position of gaining some control over the next AGM.

Most importantly, if a 14a-4 proposal is good enough for both the UMW and Starboard, we expect many other shareholders to consider it seriously for the coming year.