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Shareholder Primacy
Another controller lawsuit; proxy advisors and exec comp
00:42:51
Another controller lawsuit; proxy advisors and exec comp
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- [00:04]
A
Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. Hi, Ann. How are you?
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B
I'm fine. How are you?
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A
And I have returned for another week of podcasting. Ann, of course, is a law professor at the University of Colorado who. Who teaches and researches securities and business law. She presides over the legal end of the podcast.
- [00:32]
B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.
- [00:38]
A
Yes, we have a couple of interesting subjects we wanted to bat around today. There is an interesting decision out of Delaware involving a take private for a company which I had never heard of, called Engage Smart, where I think the Chancery Court had some interesting reasoning and some fun facts. So maybe we'll talk about that for a little while.
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B
Yep. And we'll talk about proxy advisors and executive compensation.
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A
Yes. There's an interesting angle on that I hope we can develop. So. Yeah.
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B
And we'll just throw in once again. You can email us at shareholderprimeacyreefloat, LLC.
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A
Email us with your questions and comments and hopefully just lots of positive stuff, but we can take. If you don't. If you don't have it. All right, let's. Let's plunge into Engage Smart. That's the caption on the case. Shall we? And this was a recent decision, probably in the last few weeks, I'm guessing.
- [01:40]
B
Yeah, last week or two by Vice Chancellor Laster, where he mostly sustained the complaint. He dismissed a few things, but he kept most of it alive. And as you said, the case is a take private deal of a controlled company, Engaged Smart. It was controlled by a private equity firm, General Atlantic, which had about 60% of the voting power. And at some point, General Atlantic decided it needed liquidity. It wanted to cash out some of its stake, but it was really adamant. It didn't want to lose control of Engage Smart. So it was only willing to entertain some bids for part of its stake, but not so much that it would lose control of the company. So the plan for they would find a buyer who would buy out the public shareholders and then buy out a little bit of General Atlantic. But General Atlantic would get the immediate cash and remain in control.
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A
So this is a liquidity play for General Atlantic land. So they were probably getting redemptions or something, and they probably needed some money
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B
and their fund was at the end of like the life or something like that happens.
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A
That's very routine. Yeah.
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B
Yes. So this. But as you can imagine their plan. We get immediate cash, but also remain in control. Limited their buyer options.
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A
Yes, because that's what. That's what everybody wants. Everybody would love that. Get cash now. But I still want cash now. But also I want my voting shares. Yeah, right.
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B
Yeah. So a lot of, you know, buyout shops, either they weren't going to be interested in a minority stake or they would only pay a limited amount for one. And they hired financial. And everyone hired financial advisors. So the company itself, the target, Engage Smart, is it was advised by Goldman Sachs. And then there was a special committee to deal with the Take private. And it was advised by Evercore. And one of the fun things about the facts as you read through it is that there was apparently a running feud between Goldman and Evercore.
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A
No kidding. Really?
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B
And according to the allegations, according to Laster's opinion, Goldman basically tried to muscle Evercore out of the way, which Laster called a middle school status competition, but it did not. That did not work out well for Goldman, as we shall see.
- [03:41]
A
As we're about to see. So this happens. This is. This happens all the time. When the bankers. I've been involved where it's a little less so with law firms, they tend to be a little more focused, plunging into the work. But the bankers are always trying to say I have. I in particular, they try to say my network's better, I have better contacts to try to find buyers and so forth.
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B
Well, this will actually be interesting when we find out what happens, because maybe not after this case.
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A
Okay. Oh, good. Great. All right, go ahead.
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B
So during this process, Evercore said that the special committee should at least look at whole company bids or control bids just so they could get us into the market. But General Atlantic vetoed all of that. They would only be looking at bids to take a minority position. So they get a couple of bidders. And General Atlantic and Goldman particularly favor Vista. And there are a bunch of allegations that Vista was given special treatment that other bidders didn't get access to information, stuff like that. And then suddenly Vista said out of the blue, we're only interested in control, which had previously been off the table. But Vista was now saying they wanted to buy out all the public shareholders, part of General Atlantic's stake. But they also wanted to have majority control and leave General Atlantic as a minority stake in the new entity. And suddenly General Atlantic, which up until now had been vetoing all attempts at selling control, suddenly General Atlantic is okay with this. So the whole thing becomes a negotiation with General Atlantic and Vista and no other bidder is allowed to really consider taking a controlling stake. I mean, they did sign something, and then they did a go shop, but by then it was basically too late. So all the bidders that would have been interested in a control stake were functionally pushed out of the way. And they reach a deal which includes Vista buying some of General Atlantic shares,
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A
which is what General Atlantic wanted.
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B
Wanted. But. But also now Vista with control. Vista buys out the public shares. And Vista also agrees that after the deal closes, they're going to pay a $500 million dividend to General Atlantic, which gives it even more liquidity.
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A
Yes.
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B
The shareholders vote in favor of all this and the merger happens, and then we have a lawsuit which pretty much targets everyone. The board, General Atlantic, Goldman and Vista.
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A
Okay. And was Evercore impleted, Were they?
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B
Yeah, they were actually Evercore and Vista. I forget. Whatever. Course. Yeah. But. But the main defendants here, the board, General Lennox and Goldman.
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A
Okay. And so. And it was the. The plaintiffs there were obviously the public shareholders. Saying what. What were they alleging?
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B
Well, they were basically alleging that this was a sweetheart deal for Vista and General Atlantic that, you know, left. That did not maximize value for the breach fiduciary duties to the public shareholders. Now, the interesting thing about it is that it was filed. The case was filed before Delaware Revised its law. SB21. We've talked about SB21.
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A
Zillion times. A lot of times. Right?
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B
Yes. So this is being litigated under MFW standards because we've talked about mfw. This is. So, first of all, just to be clear, this is a conflicted deal in the sense that General Atlantic is a controlling shareholder and it's also participating in the buyout. And that meant that, you know, General Atlantica sort of vulnerable to a lawsuit unless the deal is cleansed right now. And we talked a lot on this pod about SB21. Delaware revamps its law to make it a lot easier for boards and controlling shareholders. Conflicts.
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A
Right.
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B
Yeah, yeah, yeah. But so far, we don't have any decisions under SB21. We're all just kind of guessing how we're going to.
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A
It's less than a year. It was less than a year ago, so. Yeah.
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B
Right. Okay. So this case was filed under the old law, and that means the old cleansing regime, the MFW regime.
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A
Right. Which is. Which we'll talk about. But that's. That's how the committees work, how the votes work, what the shareholders know, all this kind of stuff. Okay, go ahead.
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B
Right. So the MFW now That is a regime that requires the independent board, independent members of the board, to negotiate and approve the deal, and it requires the disinterested shareholders to approve it. And that's the only way you can be cleansed under MFW. Now, it's interesting because even though SB21 loosened the cleansing standards, this particular deal under SB21 would still have required independent director approval and disinterested shareholder approval. It still would have required that because it was a take private, which is the right. What sb21 did was it said even controlling shareholder conflicts can be cleansed by one mechanism or the other, and only for take privates will you need both. And this was a take private. So even under SB21. But SB21, if it applied, would still make things easier because it would have made it easier to construct committees and so forth. So. But. All right, so. So. But we're not under SB21. We're under MFW. But I still think that this case has lessons for what we might expect under SB21. And that's why. I think it's.
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A
That's why. That's why it's kind of interesting here. Okay, so. So just to recap, it's this. The whole take private and so forth, and General Atlantic and its banker, Goldman, or the company's banker. Goldman.
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B
Yeah, the company.
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A
The lawyers, probably.
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B
Well, actually, it started. Goldman started as General Atlantic's banker and then switched to being the company banker.
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A
And it's not easy. Whoa.
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B
Okay.
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A
I mean, there's a lot of bankers you can hire someone really wanted.
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B
Oh, they're all at least five.
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A
Right, so at least five. Okay. All right. So. So I think the interesting part of this, based on my quick read of Vice Chair, Vice Chancellor Lasser's last year's opinion, which, by the way, he is an unbelievable writer, I will say. I mean, they are. I mean, you know, the various chancellors, they take pride. He really kind of, like, has some really, really good language.
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B
The only problem with Delaware painting, they're very colorful. I love assigning them, except they're always really long, and that's hard to assign.
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A
Yeah, this. That was one of my problems is I got a few do. And I said, I can't take this. I just have to ask Anne. She'll have to help me here. Anyway, so. So a lot of this turns, then, on what the company did or did not do to try to cleanse the deal, I think, is what we're driving.
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B
Yeah.
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A
Right.
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B
Yeah. So basically. So it needs MFW cleansing, which Means disinterested shareholder approval and board approval. And the only thing he took on was the shareholder approval.
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A
Okay.
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B
And basically what he said was that the plaintiffs had for pleading purposes this is just a dismissal motion. La la la. For pleading purposes they were able to establish that shareholder approval was uninformed. There wasn't enough information in the proxy and if there's not enough information in the proxy and then the deal is not cleansed which means it's entire fairness review and nobody disputes that it's at least we get past a motion to dismiss if it's entire fairness review. So they were the plains were able to establish that the shareholder approval was uninformed. So there are a couple things. First, the proxy didn't adequately disclose how much General Atlantic's liquidity needs were driving the process. It didn't disclose that Goldman was simultaneously actually had tipped Vista and given Vista like advanced info and no. Well it also didn't disclose they might have this one was critical that it didn't disclose conflicts so that Goldman was actually had been simultaneously advising Vista and General Atlantic on other deals. Oh and it didn't disclose how much the special committee had been undercut by Goldman and General Atlantic because Goldman's muscling evercore out of the way and the special committee lets General Atlantic kind of run the process. It didn't disclose the interests of other potential bidders fully so that it wasn't clear how much other bidders might have been interested in this. So all of this was material information that wasn't disclosed. So the shareholder vote was ineffective, conflict wasn't cleansed. That means it has to be reviewed for fairness and we have to go to trial to make that determination.
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A
So, so there was, there was several proxy statements or a number that were kind of put out there where this information was either missing or is a little vague or something he found.
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B
But basically all of it had to do specifically with whether the advisors were conflicted, whether General Atlantic was conflicted things, whether the special committee did its job. That's basically process failures.
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A
Yes.
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B
And also so the court. So Lasser found that the proxy statement was not sufficient and then he also said that he was going to sustain claims against Goldman for aiding and abetting the breaches of duty by the board and, and General Atlantic because so gold. So so. And this is why I say we'll see if this changes investment banker behavior. Like he. Once again it's just a motion to dismiss. You could still get out of it. But the, you know to prove aiding and abetting the Plaintiff has to show aiding and abetting a breach of fiduciary duty.
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A
Yes.
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B
The plaintiff has to show that the aider in this case, Goldman, knowingly participated in a fiduciary's breach of duty. So we'd have to. So they have to show that Goldman knowingly participated in breaches of fiduciary duty by the board and by General Atlantic. And we've talked about this before. We had a show about this where Both Laster and McCormick not long ago had merger cases where they held that the bidder, the actual acquirer, aided a breach of fiduciary duty by the target board. And in both of those cases, the Delaware Supreme Court reversed them and said, no, the plaintiffs have not shown that the bidder aided breach of judiciary duty by the target board. And Laster, in this case, he spent some time angsting over those reversals and what they mean for the law going forward. But for me, it just makes sense. Sense. And this is where Laster came out, ultimately, that you would. You would look at it differently when we're talking about an accusation of aiding and abetting against the financial advisor to the board versus the, the acquiring company, the acquirers across the table from the board. Like, we expect them to engage in hard bargaining. We expect them to manipulate the target board. That's just how a negotiation goes, right?
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A
That's right. But I've been. I've been a victim of that, and I've done it, so.
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B
Yeah, so. Right, exactly. But the advisor, the advisor to the board, like, if they're manipulating the board and they're supposed to be advising the board and the board is relying on them, that should be kind of an easier sell, I would assume.
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A
So that's really kind of like, relates to the. It's like malpractice or like a professional liability claim against. Against Goldman about the, the nature of their, of their advising.
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B
Exactly.
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A
And that's really. That's very different.
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B
Yeah. And that's ultimately where he came out. Why, like Goldman, at least the plaintiffs had stated a claim for aiding and abetting. So he concluded that plaintiffs alleged they aided the breaches of Goldman and the board by favoring Vista and also by letting General Atlantic shape the bidding. And, and this one is the funny part. He found Goldman aided the breaches because it excluded Evercore from the process. Evercore was supposed to be counseling the special committee. And so when Goldman refused to cooperate with Evercore and, like, wouldn't give them information and all that, Goldman impeded Evercore's ability to. To Counsel, the special committee which Laster found was, was part of why he found that there was aiding and abetting of breach of fiduciary duty. So I don't know if this will affect investment banks going forward, but it really does suggest that, like, you could get yourself into trouble by getting into that kind of fight.
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A
Well, and, and again, there's, there's a lot of, obviously a huge amount of ego. I, you know, so I know people who do this.
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B
So how much.
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A
And there's huge amounts of fees, too. I mean, I saw the fees here were, you know, tens of millions of dollars that were at stake. So that's part of it too. But yeah, I could easily see how that, how it could have worked out that way. So.
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B
Yeah.
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A
Wow.
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B
So. So he kept, so he kept going the case. Yeah. But yeah.
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A
What, what. So, so and just to procedurally, this was just a motion to dismiss, like, you know, early on, like summary. Summary judgment or whatever. Right.
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B
Not even talking about there's discovery. Like assuming this doesn't settle, there's going to be discovery and there's going to be a trial where a long way.
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A
Even more discovery.
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B
Yeah. We're a long way from anywhere. But the other thing is, remember, this is under the old law. It's under mfw. But I still think, as I said, it's indicative of SB21. Because remember. So the thing about SB21, and we've probably talked about this. I'm sure we have. I forget what we've said is it reads like different defense lawyers got their hands on the draft and put in like. And sneaked in all of these provisions that look really strict on the surface, but they have so many caveats and
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A
limitations and loopholes for resourceful. Exactly.
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B
That they'll make it very hard for plaintiffs to sue and very easy for boards to cleanse. Conflicted deal. It's like the deals, there are these easter eggs in SB21, okay. To trip upstream and protect boards. And one of those easter eggs has to do with shareholder approval and the
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A
votes shareholder voting on these deals.
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B
Because one way you can cleanse a conflicted deal under both SB21 and the prior law is if the shareholders vote in favor of if you have a conflict transaction, just an ordinary one, not involving a trolling shareholder. All you need is a shareholder vote. It can be cleansed and isolated from a lawsuit of disinterested shareholders. Vote in favor. That's true. Post SB2. It's true. Pre SB21.
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A
Right.
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B
But of course, if shareholders are going to Vote to cleanse a conflict. That vote has to be informed. You have to disclose material information. Obviously, right now, over the years, there have been a lot of disputes over what kind of information shareholders have to know what material information you have to disclose. And there are a whole bunch of Delaware Supreme Court cases that have said it's not good enough to just disclose the economic terms of the deal. You have to tell shareholders about the entire negotiating process. Right, right, right. And so, repeatedly, the Delaware Supreme Court has reversed Chancery decisions that found disclosures were sufficient because the Supreme Court over and over said shareholders have to know about flaws in the process. They have to know about conflicts. They have to know if directors were biased or rushed or uninformed, because that's the only shareholders can really evaluate a transaction.
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A
Exactly.
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B
But defendants have been pushing back. And this was a big issue in Tornetta, the Musk pay case, of course, because, remember, in Tornetta, shareholders knew the financial terms of the deal. I mean, they knew the Musk pay case.
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A
We just didn't know. We could guess. But in Tornetta, we didn't really understand. And we even knew about some of the relationships. Like Kimball and Elon have the same last name.
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B
Yeah.
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A
Okay. And if we cared to dig, we'd figure out that Iron Price was,
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B
you
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A
know, in deals with Musk. But relative to this particular transaction, there's all sorts of disclosure that potentially could have been useful. And the problem is, there's no way to know at the moment whether shareholders would have cared at that point. There was some evidence in Tornetta that they did. There was plenty of opposition to the original megagrant in 2018.
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B
Yeah.
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A
And it's potentially there could have been a lot more opposition had these facts been known. We just don't know. And you can't relive that history.
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B
And so. Right, exactly. And that's exactly what Chancellor McCormick held. So she held that shareholder vote was not fully informed. And one particular thing, and this one really goes to your point about how shareholders might very well have care that the original proxy statement made it clear that this pay package had been proposed by Musk himself, that the board essentially accepted what Musk proposed. That was the draft version, the public version. They edited it so much that they sort of obscured that this was Musk's idea, that he initiated this whole idea, and McCormick thought that meant that shareholders were not fully informed. But, of course, defendants argued. They argued to McCormick, and they argued before the Delaware Supreme Court that shareholders wouldn't have cared, that all they cared about were the economic terms of the deal, they didn't need to know all the details about how. How it was negotiated or who came up with what.
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A
I disagree. The shareholders. You just don't know what shareholders want to know. Right.
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B
So. Right. So the Delaware Supreme Court never really weighed in on this, as we know. But when SB21 was being drafted, when it was being passed, these arguments were still very much alive. At that point, she had already rescinded the pay package. It was pending on appeal to the Delaware Supreme Court. So this issue of whether shareholders need to know all the details of how things were negotiated, that was very much top of mind. And in that context, SB21 has this odd little drafting clerk quirk. It says conflict transactions can be cleansed either by directors or disinterested shareholders. If it's an ordinary, you know, for most conflicts, both for, you know, and then when the independent directors approve a conflict transaction, the statute is specific. They have to be informed about the material facts of the conflict, including whether the conflicted individual was involved, and I'm quoting, in the initiation, negotiation or approval of the actor transact, whether the conflicted individual, say Elon Musk, was involved in the initiation of the transaction. The board members have to know this to approve it. If it's a conflicting controller transaction, directors have to be informed about the material facts. But when shareholders approve it, the language is different. It doesn't say that shareholders have to know material facts. It doesn't say that shareholders have to know whether the conflicted person initiated the deal. Nothing like that. Instead, the statute just says shareholders have to be informed. They don't.
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A
It's very vague.
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B
Exactly. And what's interesting is that when SB21 was first drafted, the language was the same for both shareholders and directors. Originally, it said they both had to have the same information. And somewhere along the way, that language was changed. So now the statute is very specific. Directors have to know all this stuff, but shareholders only have to be informed. Now, we don't have any cases yet. We don't know how a court will interpret that language. But my suspicion is it's drafted that way to open a door to give the defendants in a future case the option to try to argue that defendants don't need to be as informed about the process as the prior case law. Sorry. That shareholders don't need to be informed that. I think it's opening the door to that argument that. So that defendants could go into court and say, well, SB21's language is clear now. Shareholders don't have to have the full suite of information they had to have under prior law. So that's why I think the engaged smart opinion is so interesting. Because even though he's not analyzing SB21, he does an incredibly deep dive into why it's really important for shareholders to understand the process by which a deal was reached. Yeah, he cites all the Delaware precedent about why it's important to know about conflicts and the Chancery decision, Supreme Court decisions, just thick paragraphs of why it's important for shareholders to understand process. So the significance to me is if in the future defendants try to use this SB21 language to argue that shareholders don't need to know about process, the engaged smart opinion is going to be like plaintiff's roadmap to just arguing. Even under SB21, a shareholder can't be informed unless they have all this information.
- [23:01]
A
And he is exactly right. I can't agree more as like a shareholder who reads this stuff and cares about these votes and so forth. So go ahead.
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B
No, I mean, I was actually going to ask you, like, let's say you're presented with a merger offer, it is a premium generating deal, no question. Are you really going to vote it down because you read about process failures and how it was reached?
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A
I might. I don't know. Yeah, I don't know. But I want the, but I want the right, I want the information and so that you can to be able to decide if that, if that's important. Okay. I mean, again, this is, this is a cousin, a distant cousin of a debate that's gone on for decades about what do we mean? Like, about materiality.
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B
Yeah, yeah.
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A
Okay. Yeah.
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B
Materiality doesn't mean it would actually change.
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A
Right, right, right, right, right.
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B
But generally a theory has been like, there's no point to shareholders voting down a deal, a premium generating deal, even if they don't like the process, because what is that going to get them? Like, are the directors going to renegotiate? Maybe a very small number of situations they will, but most of the time it's kind of take it or leave it and they're going to want the premium.
- [24:11]
A
Look, I'm familiar with many deals and part of what's interesting here is that there's not, you know, we're not talking about, you know, routine director elections. We're going to talk about this in the next segment. Actually, the votes that a shareholder needs to take on these kind of things are sufficiently occasional. They don't happen that often and frequently. They're a big enough deal relative to your portfolio, relative to the premium or whatever that you're going to want to maybe know that General Atlantic and Goldman were conspiring with the buyer to sort
- [24:44]
B
of, it's very possible in some cases the buyer will go back and like, you know, bump it up or something. It'll get something out of it if it looks like shareholders are going to vote it down.
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A
Yeah.
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B
So, but, but, but I'll add just another thing, which is that even if you assume for the purposes of argument that it doesn't like shareholders, they're not going to vote down a premium generating deal in most cases, even if the process was less than perfect. So therefore, why does it matter? Well, it matters because I think if boards know they have to disclose this stuff, they are less likely to do it potentially.
- [25:15]
A
Right.
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B
So it's prophylactic in the future deal. Like it's not about this deal. It's about boards don't want to have to self accuse themselves of having been neglectful. And so if they know they have to disclose it, they'll do a better job.
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A
I really hope you're right and I kind of expect they might. So anyway. Oh, wow, this is fascinating. All right, so this is what we're gonna have to track. We'll have to sort of see what happens.
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B
Well, with the SB20 when we finally do see SB21 cases, I'll have to wait and see. But that's, that's what I think his opinion portends for future SB21 fights.
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A
All right, well, interesting. All right, well, let's, let's take a quick break, shall we? And we can return in a minute to talk about proxy advisors and an interesting idea about why they're so controversial related to execcomp here at Shareholder Primacy.
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B
Shareholder Primacy is brought to you by freeflowanalytics.com, the only free database of corporate
- [26:12]
A
directors, their influence and their performance.
- [26:15]
B
If you own a stock or retirement plan, go to freeflowanalytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show. Welcome back to Shareholder Primacy. I'm Ann Lipton. We're talking about proxy advisors and executive compensation with Mike Levin. So you have a view about all of these attacks on proxy advisors? At this point, I've lost count of all of them.
- [26:49]
A
Yes, there's a lot. And the last two, three times we've kind of taken apart what's happening to them. And most recently we were talking about state law that was trying to go after them. And it got me wondering what really is happening here? Because a lot of this is motivated by, really by companies. It's fair to say that shareholders, their clients love them. As a general rule, they don't love what they have to pay, but in general, they're useful.
- [27:23]
B
Yeah.
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A
Yeah. There's very little objection to proxy advisors. So like all the SEC, J.P. morgan objects.
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B
But it's.
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A
Well, wait a second. It's not JPMorgan Asset Management.
- [27:37]
B
I know, I know.
- [27:38]
A
It's happy to subscribe or whatever.
- [27:40]
B
Well, not anymore. It's more. Because JP Morgan, as the recipient of the advice is.
- [27:45]
A
Right. Yeah, exactly. So, and I, and I keep wondering, okay, what's really at the heart of this of, of these companies getting such a hard time? Because if you look at it like, like put it this, ISS is an RIA they have submitted to SEC regulation. As a registered investment advisor for decades, I've looked. I don't think there's a single customer complaint the way there are dozens a day against other RAs around the country. Okay. It just hasn't happened. So clearly it's companies and their representatives and their lobbyists and so forth that are making life hard for proxy advisors. And as I was thinking about it, it occurred to me that, to ask what's the most sensitive, what's the most close to home thing that the proxy advisors do? And I, and I think it has to do with exec comp. And so I wanted to explore that for a little while. Now, this is not this, this opinion. This is more of a hypothesis. It's a theory. There's no, I don't have any. What you would call like factual documentation or evidence. I haven't, I haven't gone out. I've asked, actually, I've asked some, some company people. What's your problem with that? And people kind of obfuscate.
- [29:11]
B
Ah, you know, we got an email on this, but. Yeah, yeah, yeah.
- [29:14]
A
Yes, correct. We did. And so I started by looking at what are the various things that the proxy advisors kind of do that might annoy a company and would prompt this kind of pushback. Where companies are lobbying or their representatives are lobbying, as we talked about last time, you know, for state legislation, you know, state laws and eight different, you know, or really going, you know, trying to spend some political capital at the White House to get like executive orders on this subject. I mean, who really cares? Well, companies care. And it was wondering what they care about and why. So I kind of thought of four different areas that the proxy advisors kind of get into which are potential ways that they could annoy companies. And the only one that makes any kind of sense is the executive component. But let's look at the others. You know, the big one that everyone focuses on, of course is ESG stuff. And the proxy advisors are all being accused of, you know, being too woke or sympathizing or whatever, or not being sensitive to a company specific situation when they recommend on a proposal and so forth. And that's again, that's what they're, they're recommending to thousands of shareholder investor clients how to vote on, you know, a few hundred at least in the US A few hundred mostly environmental and social, some governance. You know, those, those tend not to be that controversial. But the ENS ones are the ones that get the attention and they get there being accused of being political. But if you look at the numbers, you know, in very kind of rough terms, you know, last couple of years there have been 800 or so proposals or maybe not under a thousand proposed at, at companies in the US and if there's 4,000 US public companies in kind of rough numbers, the likelihood of one company getting more than like getting two or more of these is pretty low.
- [31:26]
B
It's the big companies and the consumer facing companies.
- [31:29]
A
Right? Exactly. It's Amazon, it's Exxon Mobil, it's the biggies. You know, most companies aren't going to really see it and if they do, they get one. You know, and don't forget they're precatory. The failure rate is high. Okay, very few, you know, so maybe they have to like, you know, devote some precious proxy real estate to, you know, refuting this or something like that. But this, this strikes me as not worth all the, the pressure on proxy advisors just to get them to change how they handle ESG stuff. All right, so there's a couple other areas. Of course the proxy advisors also analyze proxy contests, what I do or stuff like that. And you know, and they, they, and that's where this, you know, for the special situation group at ISS and related group at Glass Lewis and they, you know, carefully look over activist director candidates and the whole case. They do very detailed analysis of the finances and you got to make the case for change and look at the directors and so on and so forth. They do a really thorough job, probably more thorough than any given investor might even do, which is why it's so valuable. If you've never read them, their reports are really, really good. But again, look at the numbers. There are 30, 40 of these in a year. Okay. And half the time or more the proxy advisors support the company.
- [33:06]
B
Yeah.
- [33:07]
A
Okay. They're very, they tend to be pretty, pretty even handed. Okay. I can't believe that companies would make such a huge case against proxy advisors because of their work on activist stuff and proxy contests. Okay. Third area has to do with just routine uncontested board elections. So this is one area where proxy advisors touch every company every year. They tell all their clients how to vote on every director that's standing for election. All right? And periodically, you know, once in a while, they're going to recommend to their clients that they vote against one or another sitting director or a whole, you know, committee. That tends to result from years of a company's neglect of its shareholders or ignoring shareholders are really, you know, presiding over a huge decline in value. Okay? But just like almost every institutional investor, ISS and Glass Lewis routinely support almost all directors in their, you know, in uncontested elections, you know, the rate is, you know, well over 90% support. Okay? So most of the proxy advisors or most of the opposition can't revolve around just routine board recommendations because, you know, companies rarely see that. Most of the time you get the ISS reports, okay? They're supporting all great. You know, it's uncontested. So big deal. The last area, of course, is what I was starting to talk about, which is exact comp. Okay, this gets to be a little more interesting, all right? Because here, just like with the uncontested board elections, ISS and Glass Lewis touch every company pretty much every year. There's some say on pay votes that are every three years, but most votes are annual. Okay. And every year, ISS and Glass Lewis do a deep dive into a company's proxy and its pay. They do extensive benchmarking. They figure out their own peer groups. If they don't like the company's peer groups, all right? They look at, you know, all sorts of history. They have models. There's some black box aspects to it, even though the proxy advisors have made an effort to try to get out from that. Okay. And I can't think of a more sensitive subject to a CEO than how much they're getting paid, all right? And they have, there are going to be many cases where they start to kind of resent iss. You miss this thing or you're not looking at the right thing and so forth, and it gets kind of, like I said, kind of personal. So my hypothesis here is that because ISS and Glass Lewis have such. And it's generally some influence. You know, they certainly have a lot of knowledge about, you know, they know as much about a company's pay package probably as their pay consultant.
- [36:10]
B
Right.
- [36:11]
A
As the board pay consultant. Okay. And they, you know, they're not. They're a little more willing to recommend an adverse say on pay vote, a negative say on pay vote compared to like board elections. Okay. And there's companies and CEOs and so forth that just don't wanna risk that. Cause if, you know. Cause then they have to. If you get a negative say on pay vote, then you gotta go meet with all the shareholders the next year and listen hard and figure out what are we doing wrong on pay to get here and so forth. That's a hassle. Shareholders are a nuisance, remember? So anyway, so my hunch. Hunch is it all revolves around exact comp. Now, if that's the case, let's dispense with all this other. About whether it's political or whether they're not really being sensitive, it's one size fits all or whatever. Let's just call it what it is that they just don't like the proxy advisors for looking at a really critical aspect of corporate governance, which is not
- [37:18]
B
only a critical aspect a company pays them, but the reason shareholders vote on pay is because Congress mandated it. So it's a critical aspect, but it's because one that federal law says you have to vote. I mean, you know.
- [37:29]
A
So my question to you is, does this sound even remotely.
- [37:33]
B
No, I think it sounds very. I would not as quickly dismiss some of the other recommendations as you do, but I can definitely believe.
- [37:41]
A
Like which ones?
- [37:43]
B
Well, I mean, so for one thing, one of the things that they comment on and the boards have complained about before is whether boards are really independent. Because boards, you know, they like, they say for the exchange listing rule purposes, we have certain independent standards. Like the exchanges have independent standards and the boards get to designate who they think are independent under exchange rules. And the exchanges don't really enforce them, but the proxy advisors, they will dispute, like you said, this is independent, but we don't think they're independent. I don't think boards like that at all. Like, they have been very upset about.
- [38:14]
A
Okay.
- [38:15]
B
By the way, the Texas Stock Exchange. I. We really have to watch its corporate governance rules when they finally become public because I think there have been hints that they're planning on weakening some of these standards, but we'll see.
- [38:25]
A
No kidding, you think?
- [38:26]
B
Yeah.
- [38:27]
A
Not Texas.
- [38:28]
B
Yeah, but. But anyway, so. Right. So I think they don't you know that whether that can. Because I think that that has knock on effects. If ISS says well, they're not really independent, even though the company says they are, that has all kinds of knock on effects, maybe cleansing down the line or whether it.
- [38:47]
A
Or for your candidacy for later. Yeah, exactly.
- [38:49]
B
Yeah, exactly. So that's one of the things. And also I think that even though most companies don't get these precatory proposals, let alone esg, you know, those ESG shareholder proposals, most companies don't get it, but the big ones that are the big ones do. And I do think that then this is the email we got. So like we had asked on a prior show, like why do they care? They're pregatory. And the email that we got was, well, boards care because if they get a precatory proposal and shareholders vote in favor of it and they ignore it, then the proxy advisors the next year will start recommending against board nominations. So proxy advisors are the enforcement arm of the precatory proposals. So even though like. And boards, so even though they're technically they're pregatory, it's not just recommendations on the, on the proposal itself, but it's recommendations on what happens if a board ignores a shareholder vote in favor. And I think they comment on governance stuff like staggered boards and poison pills. And boards don't like that even outside of activist candidacies. And I also think with predatory. And the thing about predatory proposals and another reason why boards hate them is I think my suspicion has always been that the reason, part of the reason boards hate these, especially the ES proposals, the environmental, social, is that boards don't believe their own shareholders. Like literally like if a big institutional shareholder votes in favor of an environmental proposal or a diversity proposal, I think boards think those shareholders are lying. They think those shareholders are voting for the environmental or diversity proposal not because it maximizes shareholder value, even though they say they are, but because they're trying to pers, because they think it's like good pr. It's good PR if this institution votes for the diversity proposal or this institution feels bad if it votes against the diversity proposal, that kind of thing. And so boards are kind of like, this is just a performance. It's not real. It doesn't reflect the real views of our shareholders. And if it's not the real views of our shareholders, it's really offensive to then have the proxy advisor come along and say and now you have to.
- [40:52]
A
And reinforce and reinforce it.
- [40:54]
B
And then I think also boards like, let's say a shareholder has a proposal that'll save 1/2 cent per unit on a thing.
- [41:03]
A
Yes.
- [41:03]
B
And the board might think maybe you're right. Maybe it will. But we're focused on the things that'll save $0.02 per unit on the thing. And we don't want to have to get into it with you about why we just don't have the attention capacity for your idea, which maybe is plausible, but we're focusing on the bigger issue.
- [41:19]
A
There's other more important things for us to work.
- [41:21]
B
Right. But they don't want to say that. You can't put that in your opposition, that we're just really too busy to pay attention to this.
- [41:27]
A
Yeah, see, if they were to do that, I'd be fine with that. I'm cool with that. Just tell me. Just tell me.
- [41:34]
B
They can't say that. Really. So that means they feel like they're hobbled in what they can say to oppose these precatory. So I do think that even if it's not every company, it's still enough companies that it creates this kind of resentment.
- [41:47]
A
This resentment. Anyway, so I'd be kind of curious. I want to know what others think about this angle. Yeah. So we'll have to see. Maybe I'll try to develop some evidence at some point. That would be kind of interesting, wouldn't it? To see if there's some facts that support this. We'll see anyway. All right, cool. Let's move on. All right. In fact, let's wrap up. How about.
- [42:11]
B
That's our pop.
- [42:12]
A
All right, cool. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and I'm also an advisor to investors about their activist engagements and is the professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at the activist investor. One word. Theactivistinvestor.com and you can find Ann at Law Colorado Edu. Our podcast is produced and distributed as always, by Freeflow Media. Thanks for listening. We will see you again very soon.
- [42:48]
B
It.