Rise in Proxy Battles May Get Boost From SEC : Management: Those running a company have the edge when unhappy shareholders try to take control to change policies. The agency is considering ways to even the odds.
Invoking the cause of corporate democracy, New York investor Martin E. Tash and his backers last month won control of the board of Gradco Systems Inc. by winning the hearts and minds of shareholders of the Irvine-based maker of copier and printer sorter equipment in a contentious proxy fight.
Two months earlier, at Comprehensive Care Corp., a group that included a former executive from Orange County waged a successful proxy battle over the company, which operates a chain of chemical dependency and psychiatric treatment centers. The group gained control of the St. Louis-based company’s board and ousted the chief executive.
Such victories by dissident shareholders are making companies respect the power of the proxy. Still, there is no consensus that the proxy is the best weapon for shareholders to use against entrenched corporate management.
Dissidents are winning more proxy fights and are increasingly targeting small companies.
They say interest in proxy fights has been fueled by the collapse of the junk bond market--which funded many takeovers--shareholder unhappiness with falling stock prices in a slumping economy and a general increase in activism by institutional investors.
In a proxy battle, management and dissident shareholders solicit signed proxies from other shareholders. The proxies give the holder the right to vote the shares for or against proposals or slates of directors at company board meetings. Proxy fights remain the exception, not the rule. Such battles are too expensive for most investors to launch, and the rules tend to favor management. The tender offer is still the best tool for a takeover, investment experts say.
These issues have prompted the Securities and Exchange Commission to consider reforming the proxy process to make it easier for shareholders to make their voices heard. Such changes could make the proxy a more potent weapon.
“This was supposed to be the season of the proxy fight, but the numbers have been pretty constant” compared to previous years, said Lilli Gordon, managing director of the Analysis Group, a shareholder advisory service in Belmont, Mass.
In the first 10 months of this year, dissident shareholders launched 38 proxy fights, according to Investor Responsibility Research Center (IRRC) in Washington. That compares to 27 in all of 1989 and 56 in 1988.
“My sense is 1991 will be a very busy season, and I think the profile of the proxy fighter will change beyond corporate raiders in the 1990s,” Gordon said. “People who have kept low profiles in the corporate arena will launch the battles.”
She expects more institutional and individual investors--those with large stock holdings who are unhappy with management decisions or response to outside proposals--to put forward their own board nominees in opposition to management candidates.
Still, the chances that a publicly owned company will face a proxy fight are slim. Richard Wines, senior vice president at Georgeson & Co., a New York proxy consulting firm, says that less than 1% of the nation’s 13,000 public companies will face a proxy battle in any given year. He said tender offers--a friendly or hostile offer for the company’s stock at a set price--remain far more probable.
But in the proxy battles being launched, challengers are meeting with greater success than in the past. This year, dissidents won 34.2% of the fights monitored by IRRC, compared to 31.6% management victories and 34.2% neutral outcomes, such as settlements. That compares to 21% dissident victories, 60% management victories and 19% neutral outcomes in 1988.
As a result of dissidents’ increased success, Wines said, he urges companies to try to stave off proxy fights by taking steps to identify who their large investors are and learn their concerns.
Of proxy fights launched this year, 24 involved battles for full board control. Dissidents fared worse in such fights, winning only 25% of the time, compared to 50% management victories and 25% neutral outcomes.
But proxy experts said dissident gains are hidden in these numbers, noting that settlements generally involve some kind of concession by management and a measureable gain in influence for the dissidents.
Sometimes even only the threat of a proxy fight has prompted management teams to make concessions.
Sources said that was the case at Costa Mesa-based Emulex Corp. when Fred B. Cox, co-founder and chairman, agreed to give up the posts of chief executive and president. His move came after the company reported a $3.1-million operating loss in April and an outside venture capitalist who had previously tried to take over the company regained a seat on the company’s board.
“If you look closely at the goals of the dissidents, you find that they use the proxy fight as a tactic to achieve them,” Gordon said. “This year they got their way two out of three times.”
Her firm identified six motives for launching proxy fights: acquiring the company, seeking board approval of a company’s sale, forcing a change in corporate policy without a sale or liquidation, replacement of management, monitoring board activities and changing the company’s governing structure--such as repealing anti-takeover measures.
Although gargantuan battles, including corporate raider Harold C. Simmons’ attempt to take control of Lockheed Corp., grabbed headlines this year, more smaller companies were besieged by rebellious shareholders. Only nine of the proxy fights launched this year involved Fortune 500 companies.
“This proxy season, there were a lot of high-profile battles,” said Howard D. Sherman, vice president of Institutional Shareholder Services Inc., a company advising institutional clients on proxy voting in Washington. “I’d expect next year it will filter down to smaller companies as the awareness spreads.”
One reason is simple economics. If a company’s earnings suffer and its stock price falls, shareholder unrest rises, said John Giovannone, a lawyer who advises companies about proxy law at Sheppard, Mullin, Richter & Hampton in Newport Beach.
There is also a growing activism among institutional investors, who closely watch bottom lines. Although institutional investors--insurance companies, pension funds, money market funds and others that invest huge pools of money--often are content to be silent investment partners, more become vocal in demanding that companies protect shareholder interests.
One such institutional activist is the California Public Employees Retirement System.
Institutions can become “kingmakers” in proxy battles. Although they rarely lead the fights themselves, they favor independent boards and are often courted like royalty in proxy fights because they control big stock blocks.
Their activism is reflected in the dramatic increase in shareholder proposals. The American Society of Corporate Secretaries (ASCS) in New York said its 2,400 member companies report that shareholders submitted 739 proposals for the year ended June 30. Five years ago, only 442 proposals were submitted by the group’s shareholders.
Most proposals pertained to issues of changes in corporate ownership, shareholder rights, executive compensation, corporate governance and social concerns such as the environment, said Richard Pyle, the society’s vice president. He said that this year votes in favor of such proposals reached record highs.
At Calabasas-based Lockheed Corp., management defeated Simmons’ bid for board control but promised to add three directors to represent institutional shareholders. It also approved four Simmons-sponsored proposals--to rescind a poison pill plan, renounce greenmail, institute confidential voting and opt out of Delaware’s anti-takeover law.
The state retirement system backed Simmons in the fight, a clear sign that institutional investors, who control $2.6 trillion in investments and own roughly 18% of all stocks, are no longer blindly casting votes in favor of management proposals, Sherman said.
At Gradco, all but one of a dozen institutional investors voted with the dissidents. Those shareholders were upset with huge stock losses and a controversial plan to restructure the company.
Tash and his supporters contended that the plan would have enriched management at shareholders’ expense.
The Tash-led group won majority control of Gradco, prompting the immediate resignation of company founder and Chairman Keith Stewart.
At CompCare, dissidents who were dissatisfied with the company’s financial performance won majority control in a proxy fight that lasted eight weeks.
The dissident committee was headed by Portland securities broker Les Livingston, who had invested more than $1 million of his firm’s cash in CompCare stock in anticipation of a merger that later fell through.
Gradco and CompCare were vulnerable because of their bleak financial performance. But proxy fights are expected to increase nationwide regardless of the state of the economy, experts say.
John C. Wilcox, managing director of Georgeson & Co., said proxy fights may increase because more shareholders are demanding that boards serve as independent liaisons between shareholders and management, rather than tools of management.
But some dissidents protest that there are roadblocks in their way. Ralph Whitworth, president of the 64,000-member United Shareholders Assn. (USA) in Washington, complains that the deck in proxy fights remains stacked against dissidents.
“You won’t see the effects of proxy activism until you have a reform of the voting process,” said Whitworth, whose group was founded by corporate raider T. Boone Pickens in 1986.
Proxy fights can be less disruptive, less expensive and more efficient than traditional tender offers, Whitworth said. And dissidents can achieve their goals if they succeed in swaying the votes of a few large institutional shareholders.
As a takeover tool, the proxy vote has drawbacks.
Management can use company funds to finance its own proxy campaign. Gradco spent about $1 million on an investment banking firm, a public relations firm and a proxy solicitation service in an unsuccessful effort to fend off Tash, who spent $400,000.
Moreover, rebellious shareholders are often on the outside looking in, unable to gain access to confidential information or even lists of shareholders. Therefore, they sometimes are unable to come up with alternatives to management proposals.
To fend off proxy rebels, management can take defensive steps such as giving directors staggered, three-year terms; eliminating shareholders’ rights to call a special meeting; making it costly to remove board members, or by expanding the board, Sherman said.
And just as they did in lobbying for anti-takeover laws, companies can lobby for state laws to limit proxy battles. (Massachusetts and Pennsylvania, experts say, have such laws; California has less stringent measures and one cumulative voting procedure that favors dissidents.)
“You have to have a lot of money to wage a proxy fight,” said Randy Young, president of Everhart Corp., a Santa Ana venture capital firm and a member of USA. “There’s no question where the odds lie.”
Thus, the victories of dissidents such as Tash, who used no proxy solicitation service but rather relied on a groundswell of disgruntled investors, are all the more surprising.
In the coming year, some experts say, the odds could change. The SEC is taking proposals on proxy reform from a variety of groups including the USA, the state retirement system, the American Bar Assn. and the ASCS.
The SEC has already loosened its restrictions on what issues are appropriate for shareholder proposals in proxy statements.
Despite objections from companies, who say the issues are day-to-day management issues, the agency has allowed several shareholder resolutions on golden parachutes, confidential voting and shareholder advisory committees.
In entertaining some sort of change, SEC officials say, they want to improve corporate governance to boost U.S. companies’ competitiveness. For instance, Philip R. Lochner Jr., an SEC commissioner, said in a speech in May that proxy reform may be necessary.
But Lochner promised that the commission will listen to the voice of reason, sorting the facts from the shrill calls for “corporate democracy” among dissidents and cries of “proxy chaos” from management.
DISSIDENT VICTORIES IN 1990 PROXY FIGHTS ALLEGHANY CORP., New York: Dissident: Allan P. Kirby Jr. Goal: oppose management proposal to extend unequal voting rights plan to 1995 Outcome: proposal defeated BAY MEADOWS OPERATING CO., San Mateo, Calif. Dissidents: diverse shareholder group Goal: elect dissidents to board Outcome: five members of dissident group elected CALIFORNIA JOCKEY CLUB, San Mateo Dissidents: diverse shareholder group Goal: elect dissidents to board Outcome: five members of dissident group elected BSF BANKORP Dissidents: First Capital Group, Frederic H. Gould Goal: win one board seat Outcome: Dissident won seat, but will relinquish it and agree to a five-year freeze-out in exchange for reimbursement of expenses BUILDERS TRANSPORT INC., Camden, S.C. Dissident: David C. Walentas, Stanford M. Dinstein Goal: win full control of board Outcome: Dissidents elected to board COMPREHENSIVE CARE CORP., St. Louis, Mo. Dissidents: James Carmany, Les Livingston Goal: take control of five-member board Outcome: Dissidents win control of board, Carmany becomes chairman GRADCO SYSTEMS INC., Irvine Dissident: Martin E. Tash Goal: take control of five-member board and oust Chairman Keith B. Stewart Outcome: Tash wins three-seat majority on board, replaces Stewart. GREAT NORTHERN NEKOOSA CORP., Norwalk, Conn. Dissident: Georgia Pacific Goals: call special meeting, replace board, repeal antitakeover provisions Outcome: Dissident called meeting, target agreed to be taken over KINARK CORP., Tulsa, Okla. Dissident: Altair Corp. Goal: nominate Dissident directors Outcome: Dissidents won three seats NAPA VALLEY BANCORP, Napa, Calif. Dissident: Michael Conners Goal: elect himself to the board Outcome: Conners wins seat NATIONAL INTERGROUP INC., Pittsburgh, Pa. Dissident: Centaur Partners Goal: replace three board members, pass corporate governance proposals Outcome: Centaur won three seats, ousting chairman. proposals passed NEW YORK BANCORP INC., North Hills, N.Y. Dissident: Patrick Malloy Goal: win two seats on board to manage Home Federal Outcome: Dissident won two seats XTRA CORP., Boston Dissident: Robert M. Gintel Goal: replace board Outcome: Dissident won Source: Investor Responsibility Research Center and Georgeson & Co.
