Indicative, We Think, Of A Serious Level Of “Inattention To Details” And A Serious Industry Brain-Drain
Where to begin? This year, through June, your editor and his team of Independent Inspectors of Election attended over 250 Annual and Special Meetings of Shareholders. And in his 30+ years of attending meetings, he has never seen so many oddball situations.
Let’s start with one of the most basic requirements of an Annual Meeting; the state law provision – a universal one, we think – to have a properly certified list of shareholders at the meeting and available for inspection. This is the first thing the Inspector should look for upon arriving since it is the Inspector who is charged under most state laws with determining the number of shares entitled to vote at the meeting: Our group attended roughly a dozen meetings where the Transfer Agent failed to send any list at all. At two meetings, the list was not properly “certified” by an authorized officer of the transfer agent as being “complete and correct”…And in both of these instances, there were no TOTALS! At two meetings the list bore a date that was not the record date. One list was over a month stale. Ouch!
Of the 236 meetings where there was a certified list, more than a dozen of them had totals that differed from those that were reported in the companies’ proxy statements: One very large company discovered that roughly 10,000 names and 9 million shares were missing from the list they’d received. Most of the numerical discrepancies encountered were fairly minor ones however, and most seemed to be due to timing differences, where the company had repurchased some securities around the record date that had not yet settled when the list was prepared. (We have written about this before, and we are constantly amazed at how many different places some companies use to stash their non-voting Treasury shares…and wonder how anyone ever proves their books.) A few were due to known “bookkeeping differences” that were, reportedly, in various stages of investigation, and which were, fortunately, not big enough to change any of the outcomes.
At three meetings the differences in the “shares outstanding” were fairly large ones, though still not material in terms of the final outcomes…at these meetings. Here, the Inspectors were told they were due to Stock Appreciation Rights, or SARs, or maybe to restricted shares: We ourselves have never heard of holders of anything getting voting rights unless the shares were “issued and outstanding”…And SARs clearly did not meet these criteria. Nor could we find any “restricted shares” anywhere on the shareholder list. Here, we think the comp-consultants, and their lawyers, simply did not know what they were doing when they drafted the terms and conditions of the SARs. Nor did they recognize that “restricted stock” is stock…and should be “issued and outstanding” - albeit with a “restricted legend” - in which case, they’d be ON the shareholder list…We will leave that to the lawyers themselves, and their clients to decide. But in at least one instance there was a large enough number of “unissued” and “non-outstanding” “stock” that was presumed to have voting rights to create an issue if there was a close vote on something.
At one meeting, our Inspector called the client to warn that there might not be a quorum present, only to learn… “No worries, we have a second class of closely held stock that will assure a quorum.” “Who are these folks, and where are they mentioned in the proxy statement?” our Inspector asked. (Mentioned in passing on page 198 as it turned out, and not included in the statement as to the number of shares entitled to vote at the meeting!). “And did they get a proxy card?” (No, as it turned out, but some just-in-time scrambling took place to save the day).
At four other meetings we discovered that there were classes of stock that HAD a vote on some items, but where no proxies had been distributed (mostly because they were closely held, and folks assumed [?] the owners would be there to vote in person.) Yikes!
We encountered one company that had “time-weighted voting” – something that had a brief surge of popularity back in the 1980s – and where the draft proxy statement and proxy card stated the qualifications for extra votes essentially backwards: It took about 10 hours to discuss, then to parse the confusing language of the old bylaw provisions phrase by phrase, before everyone was convinced that yes, the last condition was one of six conditions that conferred super-voting rights…and it did not negate the previous five conditions, as most readers originally thought.
At five of the meetings we attended, we discovered multiple and conflicting statements in the proxy statement as to what, exactly, it took to “pass” one or more proposals: At one company, their outside counsel, relying on what the model code for the state of incorporation said, insisted that a proposal needed a “majority of the voting power present at the meeting in person or by proxy”; i.e. the quorum. By that standard the proposal had only 47% of the quorum in favor, and would fail. But if one looked at another paragraph in the proxy statement, the proposal needed a majority of the votes cast – and by this standard, and because of the big number of abstentions and broker non-votes there were - the proposal would pass handily, with 68% of the “votes cast” Counsel insisted that the state code trumped the company bylaws…Fortunately, though we did not agree, this was not the Inspector’s dogfight. He or she needs only to report the numbers. Then - out of the blue - someone remembered that the bylaws had been amended, well before the meeting, to require a simple majority of the “votes cast” - and that this amendment did indeed trump the model code. A few red faces, but problem solved!
One of the weirdest vote-counting conundrums we encountered was similar to the situation immediately above and involved what we think is an unintentional wording mistake in the NYSE rule book. Here, outside counsel insisted that NYSE rules required abstentions to be counted as “votes cast” (an anomaly that was being aired just then on one of Broc Romanek’s blogs, and yes, that’s the way the rule reads.) …And counting that way would cause the proposal to fail. “It’s not really our dogfight,” said we, “but if one goes by the SEC’s definition of a ‘vote cast’ – or the plain English definition of an ‘abstention’ – as something that is distinctly and intentionally different than a ‘vote cast’ – the proposal is passing handily. WE think the SEC trumps the NYSE…but if they, or anyone else object, you could simply delist.” Cooler heads prevailed here too.
We personally observed one of the least satisfying outcomes of the season - from both a common-sense and a fairness perspective - where abstainers decided the result: The company, which suspected they’d have a harder than usual time attracting new directors in the current environment, and which was happy with those they had, had a proposal to extend the retirement age for directors by two years. The actual voters were heavily in favor of the idea; about 60:40 as we recall. But, because there were a lot of abstainers, and because two institutions that had said they’d vote yes voted no on the morning of the meeting, the proposal was missing the mark by roughly one-percent. The company was able to reach one of two institutional investors, and rather quickly convinced them that a yes vote would be OK after all. But ouch! Because the meeting was already in progress by then – and maybe because the company feared the press might jump all over them for “arm twisting” – of which there really was none – they let the proposal go.
All told, we encountered weird and/or unexpected problems with the “fine details” at 44 of the 250 meetings our team attended in the April-June period - 17.4% of the meetings our team inspected: An all-time record number of glitches in our long experience. As we keep reminding, at annual and special meetings, the devil IS in the details…so let’s all resolve to pull up our socks, and make our vendors do so too next year.
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