More ill-winds seem to be sweeping the streets in the run-up to the spring meeting season: So far this year, four well-known companies have sued gadfly John Chevedden, seeking to block his non-binding proposals from coming to a vote: EMC Corp., Express Scripts Holding Co., Omnicom Group, Inc. and Chipotle Mexican Grill.
A group of 19 activist investors - including Julie Goodridge of NorthStar Asset Management, Tim Smith, of Walden Asset Management, leaders at Boston Common Asset Management, Trillium Asset Management, The Interfaith Center on Corporate Responsibility…and yes…the Maryknoll Sisters and Sisters of St. Francis, to name a few – immediately sent sharply worded letters to the Chairmen of the Boards and CEOs of all four companies, questioning “the necessity, wisdom and use of shareowner resources,” asking why they deemed it necessary, “what specific benefits will come to shareowners?”…whether the company is concerned about potentially negative public reaction… and whether the Board approved “management’s high- risk plan to engage in unnecessary litigation, rather than constructive engagement?”
Express Scripts handily – and very properly so, in our opinion – won its case in a Missouri District Court, which granted summary judgment on the grounds that there were four separate misstatements of facts in the Chevedden proposal.
But the three other lawsuits were quickly dismissed for lack of standing, basically on the grounds that “no actual or immanent harm” to the company would come from allowing the proposals to go forward to a vote, as the judge in the Omnicom case ruled.
In the EMC case, the Massachusetts federal district court judge described the EMC’s action as “an inappropriate practice of depriving the SEC of the opportunity to perform its proper role” – also noting that “abetting an end-run around the SEC deprives shareholders(s) of a relatively inexpensive opportunity to get claims disputes resolved.”
Here’s where we come out on all this:
The OPTIMIZER’s editor totally agrees that public companies should not, and should not be obliged to include proposals that contain material misstatements of fact in its own proxy statement.
We also agree with SEC Commissioner Daniel Gallagher, that “use of the statement in opposition is sometimes an incomplete remedy. Taking valuable space” (and expensive time, we’d add) “to correct misstatements distracts from substantive discussion about the proposal itself, andproposals thatareoverly vague” (or that betray a total misunderstanding of the proxy process and how it works, we’d add – like those crazy new ‘confidential voting’ proposals, or the equally ill-informed one about granting proxy authority on ‘all other business’) “ make it difficult to draft a sensible rebuttal.”
Thus, we also agree with Gallagher that “A company should be able to use all available means, including litigation, to fulfill its fiduciary obligations to all shareholders by seeking to exclude improper proposals.
We even agree with co-defendant James McRitchie, who was described in the NY Times as complaining that such suits are meant to “make small shareholders ‘think twice’ before filing proposals” – which we wish that sloppy thinkers and sloppy filers WOULD DO!
And finally, we also agree with Gallagher’s remarks at a 3/27 conference at Tulane University, that a fresh look at both the dollar and ownership-period thresholds for submitting shareholder proposals is way, way overdue… and that new thresholds for re-submission should also be considered.
But we also think that both his proposed dollar or percentage-ownership limits –and his proposed “three- strikes-and-you’re out” limits are way, way off base. It must be noted that a huge number of the governance provisions we now take for granted were submitted by small shareholders – and often took nearly a decade to gain traction with voters.
Also, as long term observers of and participants in the proxy voting process, we have to warn that having the company perceived as being a bunch of big, bad, billionaire-bullies of little investors is NOT a good place to be…
And, worst of all, it can call down a raft of fresh new shareholder proposals – and automatically-cast Votes-No against one’s own proposals – if activists decide to retaliate, or to ‘send a message’ about their unhappiness with your ham-handedness.
(Apropos…and p.s. – the FORTUNE article about this flap that’s on the web – “A lazy, inexpensive way to intimidate shareholders” – incorrectly reported that Walden Asset Management “has filed a new resolution at Chevron, citing harassment of long-time shareholders.” Totally incorrect, as Walden’s Tim Smith confirmed for us…but certainly something that could happen to your company if you overplay your hand, we’d say.)
WE SUGGEST A ‘KINDER, GENTLER, AND SIMPLER AND FAR MORE COST-EFFECTIVE WAY TO ACT’ IF YOU THINK GADFLIES – AND THE SEC – ARE OFF-BASE:
SIMPLY OMIT THE PROPOSAL…AND LEAVE IT TO THE SEC – OR TO THE PROPONENTS THEMSELVES - TO TAKE ANY “ACTION” THEY FEEL IS WARRANTED.
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