En Garde: Proxy Voting Gamesmanship Is Alive And Well

– And Especially “Creative” This Season… Creating Votes Out Of Thin Air

Your editor had a very unusual experience in March, in the course of serving as Inspector of Election in a proxy contest: About ten days before the Meeting, counsel for the company called to say that one of their largest investors – a smallish hedge fund – and not part of the dissident group, according to them – called the Chairman to say they’d made an SEC filing to disclose that they now controlled 29% of the shares eligible to vote – up from the mid-teens that had been previously disclosed. They wanted three seats on the board and a plan to promptly look for “strategic alternatives” or they’d vote with the dissident group. “What might this mean from an Inspector’s standpoint?” the attorney asked.

“This does not sound right at all” said we. “First off, you need to ask if they held the shares on the record date for the meeting – and, ideally, where they held them, so you’ll know for a fact if it’s so. But frankly, there seems to be a very strong likelihood that this guy is simply bluffing – and looking to bully and bulldoze his way in.”

When questioned further, it turned out that the big investor was going to “borrow” shares – from an entity controlled by him. But when questioned still further, they turned out to be a “loan” of the very same shares he owned…and where he was planning, it appeared, to vote both the shares he owned, and the shares he lent himself…to effectively double his voting power! And had he not tipped his hand, no one would have been the wiser – unless the custodians he chose ended up voting over 100% of their positions. And even then, there was a good chance they’d still be able to vote most of the shares under current procedures – without falling foul of any SEC rules – as long as they stayed at or under 100% of what the custodian voted in total.

In this case, the investor quickly backed away. But we think he, or other investors, may have played this hand several times this season…and seems to have plans to do so again. We can’t say more yet – since the subject company is considering a lawsuit…but stay tuned. If this does not resolve itself in a courtroom, your editor will file a formal complaint with the SEC.

Here is proof positive, we say, that the only way to fix the over-voting problem – and there IS a problem here – is to require custodians to  have  a  pre-reconciliation  process  – so that “voting entitlements” are issued only to “entitled voters” – and to guarantee that only one vote per actual share outstanding can or will be counted.