This week has been good for the unexpected – especially shocks delivered by natives of New York’s outer boroughs.
Yesterday, Bronx-born Mario Gabelli’s Gamco Investors filed the first proxy access nomination, advancing a candidate for election to the board of National Fuel Gas.
Proxy access, for those not familiar with U.S. governance, is a rule that allows shareholders to apply to have their director nominations submitted to a vote in the same way as management’s nominees are. It's a big deal – pension funds such as New York City’s and the California Public Employee Retirement System (CalPERS) have spent huge amounts of time writing to general counsels, filing precatory proposals and soliciting support for their implementation; the Securities and Exchange Commission has aided these efforts; and just under 40% of the S&P 500 Index now has a proxy access bylaw.
“It looks like this will be the first proxy access fight, and I am sure it will be closely watched,” Skadden’s Richard Grossman, who has written and advised on proxy access before, told me yesterday.
Until now, few have expected proxy access to be used by activist investors. Bylaws typically require shareholders or groups of up to 20 shareholders to have held 3% of a stock for three years or more before they can nominate, whereas activists often seek to make changes in the first year of an investment. Furthermore, according to Sullivan & Cromwell, proxy access solicitations are far less flexible than where a separate proxy card is used. In National Fuel Gas’s case, if Gamco’s nominee pulls out before the end of the contest for whatever reason, he must sit out the next two nomination windows.
Gamco is not a typical activist, however. It holds many of its investments in mutual and closed-end, not hedge funds. Its average holding period for current activist investments is over nine years, according to Activist Insight Online (it has been involved at National Fuel Gas since 2010). And it has a habit of doing things differently, sponsoring a precatory (non-binding) proposal promoting a spinoff at National Fuel Gas a few years ago, and often soliciting proxies in-house for proxy contests proper (saving proxy solicitor fees that often run in the hundreds of thousands of dollars, and millions for the biggest fights). When I spoke to Gamco’s general counsel – David Goldman – yesterday, he told me that reducing the cost of activism was appealing; “you can piggyback on someone else’s proxy,” he said.
What happens now?
Gamco will likely submit a short biography and statement in support of its nominee for inclusion in National Fuel Gas’s proxy statement. Failing a settlement which reduces the number of candidates or increases the number of board seats, shareholders will vote on all nominees and the most successful will fill the available seats (typically by plurality standard). Gamco can make calls to shareholders, although there may be a line across which solicitation materials must be filed with the SEC.
Institutional Shareholder Services, meanwhile, has confirmed it will treat proxy access like any other contest. “We will carefully consider access nominees within the context of our existing framework for proxy contests,” Cristiano Guerra, ISS’s head of special situations research told Activist Insight in an emailed statement. “That framework, fundamentally, gauges whether there is a compelling case for change at the board level in order to arrive at a recommendation we deem in the best, long-term financial interests of our clients.”
Gamco, for which this move is likely another means of pushing for a separation of National Fuel Gas’s utility business, will be hoping for higher support than its divestment proposal received in 2015: 17.8%. Whether it will win is uncertain, not least for Gamco itself. “Being the first, we don’t know,” Goldman responded when I asked whether he thought proxy access could deliver Gamco a board seat. “We hope shareholders see the value in our candidate.”
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Activists at Farmer Brothers say they have uncovered inconsistencies in the work histories of company directors Christopher Mottern and Randy Clark – with both described as certified public accountants. According to the dissident, Clark has not been certified since 1986, while Mottern may never have held a license. Carol Waite’s stockholder group, which owns 25% of the shares but has unrestricted voting authority over less than half of that, is hoping that this late-stage intervention will shake up a contest that looks like it has been falling behind management. It is drawing parallels with former Yahoo CEO Scott Thompson, who famously resigned after Dan Loeb uncovered that Thompson’s degree was not in computer science as the world had been led to believe.
Late on Thursday, the company issued a statement saying that both Mottern and Clark received CPA certifications in the 1970s, and blamed Waite for focusing on Farmer Brothers' use of “is” versus “was” when referring to their CPA status in their biographies, instead of considering their "superior industry and operational expertise."
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Quote of the week comes from Bill Ackman, who quite endearingly suggested on his quarterly conference call with investors that he didn’t expect to pick a fight with Chipotle Mexican Grill’s management, despite their hiring Joele Frank, Morgan Stanley and Goldman Sachs. “Our investors should not be concerned that we're in some kind of hostile engagement here,” he said. Truly there must be new regimes both at Pershing Square and at Goldman!