← Shareholder Primacy
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- [00:05]
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 mostly real life. Ann and I are back again today for you, for our followers here. Ann, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of this podcast.
- [00:30]
B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.
- [00:35]
A
Right. I make an effort anyway. So how are you doing, Ann? You doing great?
- [00:40]
B
I'm doing fine.
- [00:41]
A
Oh, good. So we're kind of busy here, but I thought we would maybe talk about that a little bit, so.
- [00:51]
B
And I guess before we get started, once again, reminder that for anyone who wants to talk to us, you can email us at shareholderPrimeCrimeFloat LLC.
- [01:02]
A
Yes, that is our email box and we welcome your comments and critique and suggestions. So anyway, yeah, yeah, sure.
- [01:11]
B
Today I, yeah, I guess the topic for today is me basically asking you, what do you do? I mean, I get you're an activist, but like, what does that exactly entail? What do you do? How do you go about your activists stuff? Like what does it involve?
- [01:27]
A
Right, like, you mean overall or like this month?
- [01:30]
B
Well, I'll, I'm happy to know what you're working on if you can, whatever you can reveal. I assume some of it you can't, but, but you know, just sort of how do you go about doing what you do and if there's anything in particular you're working on that you can share?
- [01:44]
A
Yes, you know, unfortunately the, the one thing that I could share was disclosed last week. I'm on a new board of a, of a highly, highly troubled company called Charleston Colevard. We can talk about that in other podcasts because there's a lot of work to do. The 8K on that was filed last Friday, ticker CTHR, in case anybody cares. But, and again, you're not the first to kind of ask this question. You know, actually there's kind of two questions that activists get, or at least activists who kind of put themselves out there, like I guess me to talk about what we do. The first question which we've talked about in a previous episode was boards ask this all the time. Why me? What did I do?
- [02:33]
B
What did I do to deserve this,
- [02:35]
A
to end up in the, in the, on the spreadsheet of an activist and so forth. And so we, there's all sorts of stuff you can discuss about, you know, what about a company Makes them more or less susceptible to activist work. That's not what we want to talk about today. It's, it was more like what are some of the nuts and bolts? What, what's sort of the work that gets done? And, and it was kind of interesting because this, you know, for a lot of people, particularly in the investing world, other than, you know, cleaning up a whole lot of year end stuff, everybody's starting to think about vacations or bonuses and all that kind of stuff. But activists are actually kind of busy right around now. So that was something that would be worth, worth talking about at least in a little bit of detail. Some of the tasks, some of the way to think about the process of doing activism. Is that sort of what you are?
- [03:32]
B
Yeah, yeah, absolutely. How you go about. Yes.
- [03:36]
A
All right. I'll begin by saying by sort of stating a very possibly overly generalized rule of thumb that the work of an activist, the time horizon generally takes three years. It's a very long period of time in the life of any kind of investment and it's because of some of the unique aspects of what we do. But it's a three year period process. The first year is spent on planning and analysis and possibly accumulating some shares in a position. And there's a whole lot of work that goes on for a year before anybody really knows it, sometimes a lot longer. But call it a year, okay. The next year there's another year that's spent on the kind of the activism itself that the actual more public type or public facing type work of doing some filings, talking to the company, talking to other shareholders. We're going to talk about all that. Okay. And then the third year or more is when you start to see results. So after those first two one year terms, you're maybe on the board or you're starting to monitor the company or you have a settlement in place that you're trying to kind of manage. So it's, we're talking in terms of at least a three year kind of time frame and that, that, that frequently is, is not well understood that anytime. Going back to the first question, I said what I was going to talk about, about why me? When a company encounters an activist in their stock, very rarely happened like overnight, it's usually because there's been a lot of careful analysis of the financials, of the business, of the governance, which like I said is sort of involves that kind of first year.
- [05:36]
B
Okay, okay.
- [05:39]
A
So then the question gets to like, what are we kind of doing like now, you know, this month while Everyone else is thinking about their bonus or thinking about their holiday. And so there's a lot of things that are happening right now in most activist shops. It's worth noting what's not going on right now, which is all that analysis that's largely done. There's been a huge amount of work in the period year, call it up till now, of getting financials, spreading them out, trying to figure out what the business looks like, doing a whole lot of intelligence gathering. There's actually a whole, a lot of activists use a lot of expert networks to try to understand a company, try to understand an industry where we're just talking to just everyone who'll talk to us about what's going on, talk to former employees, talk to former directors, founders, competitors, customers, suppliers, all that kind of stuff. So there's a whole lot of work that goes into this and this would remind some people of what a thorough kind of equity analyst might have done at one point before they got overloaded in trying to understand how to analyze a company. All that has kind of happened by now. There's some updates and so forth. But. Yeah, all right, go ahead.
- [07:16]
B
Yeah, no, no, what I was going to ask is like, it seems like you're talking about this as a time of year thing and that to me suggests like all in anticipation of next proxy ish season for most companies. I mean.
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A
Yes.
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B
Why? Because St. Nick is arriving. I mean, what's going.
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A
There's no. This is Christmas is not good to us.
- [07:37]
B
So the idea here is that everything is. So I gather what you're. What I'm taking from this to some extent is that if we assume a sort of typical annual shareholder meeting is in the April junish time frame, then this is the timeframe you have to work on. And if their annual meeting was in December, you would be working on a different time.
- [07:56]
A
Absolutely. Or if you, if you have a June fiscal year end.
- [08:00]
B
Yeah.
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A
Okay. And the shareholder meeting is going to be in like November or October, right? Yeah, all this, all this, the calendar changes. Right, Right.
- [08:09]
B
So, but so the reason you're saying this time of year is because you're assum. The traditional ish calendar where the fiscal year ends at the end of the calendar year and then there's a annual meeting and a few months after that.
- [08:20]
A
Right. You're usually right around the so called proxy season. That's a very good point. Right.
- [08:24]
B
Okay. So I just want to make sure I was clear on that. So now at this time of year, assuming a typical company working on that typical kind of Schedule. You've done all of this really careful analysis. You're in the stock, right? You're already in the stock.
- [08:36]
A
Yeah. And maybe like trading around a little bit, maybe building a position. You know, a lot of folks try to remain under 5% because of 30 filings and so forth. So maybe, maybe a block becomes available and you're thinking, oh, maybe, you know, is it going to kill us if we disclose it or something? So there's, there is some, there is some, some position management going on here. Okay. But not a, not a ton. There could be position management where we're in, you know, deliberately, you know, hovering right under 5%. And we're looking forward to going right over 5% because that's going to trigger some disclosure. So, you know, maybe we've targeted sometime in December to the next block that we need to do that or something.
- [09:15]
B
Okay. Okay. So yeah, so you've done this, so you've done all the analysis and then now what are you doing at this time of year then?
- [09:23]
A
So we have also not only analyzed the company, but we've generally by now put together a plan for the activism, sort of saying, here's the steps that we're going to take. And some folks, for some folks, the plan is a big three ring binder with tabs for a lot. It's, you know, a couple pages of outline of kind of the steps we want to take. Okay. And so it could include, you know, some thoughts about the board of directors, some thought about the business that we, what we want to change about the business. So there's a whole lot of planning that's largely been. Go ahead.
- [10:02]
B
No, I just wanted to ask, when you say it's planning, do you mean a plan for what you think would improve matters or do you mean a plan for a strategy for persuading the board to do what it is that you want them to do? Because those are two different kinds of
- [10:16]
A
plans, more of the latter.
- [10:18]
B
Okay. So you've got the analysis and you also have your. This is how you fix it, right?
- [10:23]
A
Yeah. And importantly, here's some governance stuff around fixing it and why governance is an obstacle to fixing it. So here we want to pressure the board in various ways to do different things. So again, it's more of a plan for the activism rather than plan for the business.
- [10:41]
B
Right. Okay.
- [10:42]
A
So hopefully that consistent with what you're asking. So we've largely finalized the business plans for sure. And then the activism plan we'd kind of thought about, but we're kind of tightening it up based on what we heard from other investors or what's happening in the marketplace for the company and so forth. So. But there's an activism plan that most good companies have. Most good investors have put together, and that's what we're looking at. Yeah.
- [11:14]
B
So this time of year, you've done your analysis and you've pretty much got the business plan in place and your activism plan, you've got it in mind, but maybe you're still.
- [11:25]
A
Yeah, we're starting to put it together and finalize it.
- [11:28]
B
You're starting to put that together. Okay.
- [11:29]
A
And that could be. Include, like the activism plan, could be the specific steps. When are we going to do these filings? When we're going to do books and records demand? When are we going to reach out to the board? What's the budget for this kind of thing? Under different scenarios, who do we want to retain to be a proxy solicitor, a PR firm? Okay. It could include dimensions of a potential settlement. You know, what, what are our asks? What are our fantasies? What do we really want to get out of this kind of thing? So all that, again, depending on the fund can go into that kind of activism plan. You know, what, what, what do we expect a proxy contest to look like? What are the themes of a proxy contest? You know, which directors are soft in various ways, incumbents. I mean, and, you know, what are we expecting to criticize someone really long tenured, someone really kind of asleep, somebody whatever.
- [12:22]
B
Right.
- [12:23]
A
So. So all that's gone into this planning, and so at this time of year, we're kind of tightening that up.
- [12:29]
B
Okay.
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A
Okay. One important dimension of that plan that was be. That's become much more relevant. And now after three years of universal proxy, is how many directors in a proxy contest, how many directors do we want to target for replacement or defeat in an election?
- [12:53]
B
Now, is that now? Would you. I mean, how much. It sounds to me, and in my knowing very little, it sounds to me that in these kinds of scenarios, a staggered board isn't that much of a barrier because you're not trying to take over the whole company anyway.
- [13:09]
A
Right.
- [13:10]
B
Is that, Would that be right? Like a staggered board that's largely accurate. It may mean that you can't target your particular director who you hate the most, but you can still get a couple.
- [13:20]
A
Yeah, we can still make progress. I mean.
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B
Yeah.
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A
The reason classified boards are such a sticking point and such an irritant is because first, it's like a willful entrenchment thing. Okay. It's just, it's, you know, it's it's
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B
just, it's just offensive.
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A
Yeah, right, exactly. It's just, it bothers us. But second it, that three year period I talked about, you add a year for every class.
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B
Well, if you want to take. Well, if you want to take.
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A
If you want to start getting substantial change. Exactly right.
- [13:47]
B
But if, but since, I mean my understanding is a lot of activism can be pretty powerful from a 1C2 position.
- [13:53]
A
Oh, sure. Yeah. I mean, yeah, you could start getting. Companies start changing some really important stuff just through, you know, one or two board seats.
- [14:00]
B
I mean not, I mean not, not because of the sheer power of your vote, but because of what that says about what the shareholders want and boards tend to.
- [14:06]
A
And that's a, that's a great point to bring up because we'll get to that in a second. But a whole lot of work right now revolves around outreach to other shareholders. Okay, okay. But I'll get to that in a sec. So a couple other things that are going on here. We've already kind of read the bylaws and start to do, you know, lots of corp Gov analysis. So people right now, and I'm working on one of these now is you're starting to draft bylaw amendments at this point and talk to lawyers about what that should look like. We're also.
- [14:39]
B
And what kind of, what, what kind of bylaws are you.
- [14:42]
A
Oh, if you want to like add to a proxy contest, maybe the need to change the, the bylaw for written consent or for special meetings. It's just, it's another way to add pressure on a company. Gives us more to work with in a negotiation too. So if we, if we do like a menu of bylaw amendments and maybe
- [15:05]
B
one of them will be like. I'm just trying to understand specifically like what kind would be pressure obviously ability of shareholders to call a meeting, ability to act by written consent, things like that.
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A
Those are like stuff around poison pill things.
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B
Again, none of these shareholder vote required for
- [15:22]
A
really a huge threat. I'm sorry.
- [15:24]
B
Yeah, so they're not a huge threat, but they're like pressure points and asks.
- [15:27]
A
Yes, exactly. So you do some of these and those are starting to get drafted put together. We're also starting to monitor our deadlines because again, part of that plan is a whole calendar. We know that there's this 30 day window to submit these nominations or this is when we, you know, when the earnings call is expected. And so we're going to be monitoring the whole calendar right now and finalizing that. And again that starts to really take Take shape again more really in January. A lot of these, some of the notices have started to open up now, but that's for, for most companies that have the standard, you know, 90, roughly 90 day notice period, it's, it's a little, it's really after the first of the year, couple of things that are going on, we're recruiting director candidates. So if we're, and we don't necessarily want to have like a full blown proxy fight in mind, you know, planned in that whole planning, but we're starting to talk to them. Some people have started retaining recruiters. I know a couple that are getting kind of busy now. Executive search firms that work for some of the bigger funds. Otherwise you're just, you know, talking to friends, ears, talking to other shareholders. Talk about that in a minute and trying to figure out, you know, now that, you know, for a board, now that we're looking for three candidates, for instance, you know, which three, you know, I'm long an advocate of the investor, the portfolio manager being one of the candidates. But sometimes, you know, if there's, there's, if you need more than one, you can start to reach out to networks and so forth. Starting to finally, not finally, but drafting books and records demands is starting to take shape right now. And again, most books and records demands, or many, are fairly straightforward because they're really only for shareholder information. Frequently we'll chunk in some other stuff about board minutes or other types of deliberations and so forth.
- [17:27]
B
Yes. So do the changes to Delaware law inhibit you? I mean, I know they definitely inhibit plaintiffs firms for, like, lawsuits, especially like caremark lawsuits, that kind of thing do they make. I mean, what they limit are informal materials that aren't the official board books and so forth. Does that affect you very much?
- [17:45]
A
Not dramatically. It could, depending on the situation. If there's something where we really are, you know, interested in trying to uncover some conflicts at a, at a board, you know, we, we may want to, we may be disappointed now that we can't get correspondence about this kind of thing.
- [18:02]
B
Okay, but you can get the director questionnaires, right?
- [18:04]
A
Yeah, we get director questionnaire. We can get official minutes, we can get board presentations. But importantly, this is around shareholder lists, right? We want to get registered list, nobo list. We want to get all that.
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B
Right.
- [18:16]
A
And so, so that. Yeah, and so predominant books and records demands among activists, at least right now, are for that kind of shareholder information, which, you know, leads us to the main huge activity that's frequently underrated is contacting other shareholders and starting to, you know, feel them out about, you know, how much change they want in a company.
- [18:39]
B
So you're getting. Oh, I'm sorry. I just want to make sure. So you're getting the shareholder list and you really can get information. I mean, just because I kind of assume so many may not have their name available because. But apparently you get enough that you can really.
- [18:52]
A
Oh, yeah. I mean, sure, we can, we can get a bunch of shareholder information from, you know, 13 filings and from other disclosures. But, you know, requesting the Noble list, which we could probably spend a whole episode talking about. Non objecting. Beneficial.
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B
Yeah, yeah, yeah.
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A
And so.
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B
Right. I just didn't know how many are objecting.
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A
Oh, there's. You can, you can get, you can get a large number of really interesting shareholders that are not in a disclosure position, that are not in a big fund. It could be a hedge fund that's, you know, got some position, you've got some founder. There's all sorts of information from a Nobel list.
- [19:29]
B
Okay.
- [19:30]
A
So submitting those books and records demands right now is. Or at least preparing them helps us to kind of contact other shareholders, which is a huge part of this. You know, with my 3%, I think I've talked about this before, my 3%, I'm not going to get very far. I'll get a call back and maybe some meetings. But, you know, at no point does the board say, with that kind of shareholding, oh, man, you're just a genius.
- [19:57]
B
You really.
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A
We're going to do. Why didn't we think of this before?
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B
Right.
- [20:00]
A
However, if I can say to that board, I am confident that another 25% of the shares agrees with me, that totally sets up a whole different setting for the activism. But you're not going to know that until you start reaching out to these folks. And that's what kind of November and December and maybe January are kind of. For some of the larger institutions and so forth, they're not going to take our call until you know something, something big is going on. So it's a proxy contest and so forth. You know, you're not going to get to the big three unless there's something for them to start to vote on. But there's a whole range of other shareholders that usually are happy to talk to you. I mean, we have a conversation about what's going on with the stock and what do they think of the board and what's going on in the industry and so forth. And those are very constructive conversations that help build trust, help, you know, test our thesis for the company, see if other shoulders agree with, in fact, what we want to do with the business, and then set us up for kind of discussions with the. With the company at some point. So that's kind of what I've been working on, that kind of stuff.
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B
This, you're doing this. You're preparing the request. You've already put them in and talking to shareholders.
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A
A request for the. Like books and records demands. Some of them have gone in already, but others. Others may next month. I mean, part of the problem. Yeah, go ahead.
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B
I mean, is that if you haven't followed the 13D, is that really the first actual. The board now knows you're there because you've requested the shareholder list.
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A
There's. There's actually two moments when the board will. And again, any board that's surprised by this is delusional. Anybody.
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B
Well, they should just be able to tell because they know that they're under.
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A
They just know that their stock isn't doing well. And there's. Okay. And, you know, maybe they've seen an activist that's filed a G. Okay. So they're over 5% that way, or maybe they only got 3%, but, you know, and they just haven't been able to figure it out. So there's two moments when this happens. First is right when we kind of submit a books and records demand. And again, we've probably been in touch with the company over a period of quarters.
- [22:15]
B
Okay.
- [22:16]
A
Because maybe we'll want to talk to the CFO about something or we'll have a question after a call so they kind of know we're there. Okay. But the demonstration of activist intent that isn't required to be filed is either filing your books and records demand or converting shares from street name to record name.
- [22:36]
B
Oh, most everybody.
- [22:39]
A
Yes, most everybody owns. You know, they own their shares as a prime broker. Nobody owns shares. I mean, it's hard to trade otherwise.
- [22:48]
B
Right.
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A
But once you take 100 or a thousand shares and put them in record name, usually that's a clue that you're gonna want to send, serve some sort of formal notice to the company about something.
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B
Right, Right.
- [23:00]
A
Okay. So that's. That's the other tip often. And again, companies, good companies know all this. You know, they're already monitoring the record list. You know, some of them do it daily. And of course, you know, they're gonna know when they get a books and records demand.
- [23:15]
B
Okay.
- [23:15]
A
Anyway, so that's what's going on. So we're kind of getting ready for next month after that, you know, getting ready to send notices out and so forth and preparing for this.
- [23:25]
B
Well, once that stuff becomes public, I look forward to seeing what you're doing.
- [23:30]
A
Well, yeah, there's, like I said, there's at least a couple others that I'm working on that may or may not. I mean, most of what I do never becomes public because
- [23:37]
B
once they know that you're there and they know you have shareholder support, you're able to negotiate some kind of settlement.
- [23:42]
A
Right. Or they're resisting anything we want to do, and we decided it's not worth it to pursue it any harder. That happens, too. But there's a whole nother group of activists that are at work right now that we should probably talk about. And these are the ESG folks who are also busy at this time of year, but they're busy on some other stuff. So why don't we take a quick break and return to them in a minute, shall we? Okay, well, let's do that here at Shareholder Primacy.
- [24:13]
C
Shareholder Primacy is brought to you by freeflowanalytics.com, the only free database of corporate directors, their influence and their performance. 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.
- [24:41]
B
Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin. And we're continuing to look at what activists are up to, but we're turning, we're now leaving aside the financial activists, what I call big A activism, and we're looking at what I call little A activism, sort of, you know, I don't want to say financial, non financial, because a lot of ESG people would say this is financial, but like, you know, big A and little A. So what are the little A ESG activity?
- [25:10]
A
Well, I think the very short answer is this. At this moment, in December of 2025, they are very worried and possibly panicked because their activism pertains almost entirely, not exclusively, to shareholder proposals. And there's a lot of discussion. I don't want to diminish the amount of interaction that a lot of these activists have with the portfolio or the company. There's meetings, there's discussions and so on and so forth. But those inevitably lead to either a decision to not File A proposal, a 14, a 8 proposal. You see where we're going with this? Or to file a 14A proposal, refine a proposal on some subject where an activist has been having a dialogue with a company. Okay. And as I said, for various reasons that we've talked about a little bit before, but we can sort of update here, those activists are in a bad mood. So. And the reason, of course, is because the SEC is, it's looking like going to make it a lot harder for them to do their work. And you and I have both seen the same stuff. But let's talk in the same. Oh, go ahead. You were going to ask questions.
- [26:33]
B
Oh, no, I just had a question.
- [26:35]
A
Yeah.
- [26:36]
B
And I feel, I know there's been empirical work on this, but I don't recall where I saw a glimpse of it once. So I'll just ask. From your point of view, I always wondered, like, obviously you don't do ESG activism and you've said you don't like shareholder proposals or nonbodies finding all that,
- [26:55]
A
but I'm not a fan of precatory ones.
- [26:59]
B
But still. And even today, even a couple of years ago, some of them became more successful and fill out the report on emissions, diversity report, whatever it is, or even sometimes the governance stuff, separate chair and CEO, when you see those proposals succeed, which is still a rarity, even when they became a little bit more common, did that ever look, was that something you would look at as a big A activist, as something like this is an indication that shareholders are unhappy, which may make it a target? Is that useful information? Yes.
- [27:38]
A
Yeah. Yes. We will look at the votes that precatory proposals receive. We don't put a tremendous amount of weight on those, but that's something that will go into that. All that planning we talked about, because we're. Yes. We're trying to diagnose shareholder sentiment here. And in the same vein, we look pretty carefully at San Pei vote results.
- [28:06]
B
Right.
- [28:08]
A
Okay.
- [28:08]
B
Because. Yeah, that was always my sense that like, even if, like the predatory proposals are a signal of unrest, which, and that can be useful even if it's, you don't think, it's not that you care about the diversity thing or the, you know, whatever else it is, but it signals a shareholder unrest.
- [28:23]
A
Right. And we'll look more carefully at those votes and sort of see if certain hedge funds or certain other non outside the massive indexers because they usually tend to vote on the predatory stuff per policy. But if there's some big hedge fund that in fact did vote and we could look up at a form MPX and sort of see and we'll say, hey, oh, you voted for this proposal, this government. Well, that's interesting. What are you thinking? So, so, yeah, so. So those are a legitimate way to try to assess shareholder sentiment. So I don't, like I said, it's not, it's nothing that I think is a way to help change a company. But as long as the information is there, I'll, I'll avail myself of it. Got it. So does that. I think that sort of addresses what you're the kind of. The thinking.
- [29:11]
B
That was exactly what I.
- [29:12]
A
Yes, exactly. So anyway, so all these activists that are doing this, they've spent their summer and their fall planning the stuff, looking at which companies they want to meet with and who they're targeting and so forth, looking at how the votes went last year and so forth. So they're doing a whole lot of planning the same way that kind of like big A or financial activists have addressed this. They've had some meetings with some companies. Again, that's not happening as much as they'd like. They've also drafted their proposals. They've. And again, the proposal drafting there is pretty straightforward because a lot of the activists use similar proposal from company to company. They've documented their ownership. That's always a big thing. And we'll actually talk about that in a minute. And most of those proposals have been submitted. Now the deadlines for submitting 14 proposals tend to be a little earlier. It's either 120 to 150 days before meeting date or anniversary of the meeting. Meeting date. And so those comp, those proposers, those proponents were kind of sitting around waiting for the inevitable SEC no action dance where, you know, SEC will issue a no action letter or they'll, they'll, they'll get the request for no action from the company and then they do their response and then there's some back and forth and that whole process has been totally upended and disrupted.
- [30:40]
B
Yeah.
- [30:41]
A
And so that's what I was kind of hoping to bring out again here.
- [30:44]
B
Yeah, yeah. So that, yeah, that process has been disrupted.
- [30:48]
A
Yes, so. So. And I had thought that the disruption. Just a few weeks ago I had asserted, I actually wrote a post on this. I thought the disruption was going to be kind of minor. Oh no, I was, I was under the impression that companies wouldn't, you know, now that they didn't have the COVID of official SEC no action relief, they would maybe. And it's looking like I was wrong.
- [31:12]
B
Well, I don't think, Yeah, I don't think that's. But it's, it's, it's sort of complicated. So. Yeah, so and by the way, we also got. I'm going to shout out that we got a mailbag asking about this. These changes.
- [31:23]
A
Oh, yeah, yeah, yeah, right. Oh, that's a good point. We talk about another time. But yeah, someone. Someone asked about this specific thing.
- [31:27]
B
Yeah. How this changes, what happens and the pros and cons. So let's just. Well, we'll cover, like, what's going on and briefly, because we're. We've been going for a while say what I think of this. So. Okay, so normally what the SEC does it, like previously is it is legally required. Legally required that if a company wants to exclude a shareholder proposal, it has to actually notify the shareholder and notify the sec. I'm excluding a shareholder proposal on this basis. And at that point, the SEC sort of had a practice of saying, we agree with you, which would basically mean that the SEC would not sue you if you took that step.
- [32:06]
A
The shareholder could not pursue enforcement.
- [32:09]
B
Yeah, right. Not pursue an enforcement action. The shareholder could still sue you and very rarely did. But the SEC was essentially say, we're not going to sue you, or the SEC would say, actually, we think you're wrong. And almost certainly if the SEC said, actually, we think you're wrong, you must include it. Companies would let it drop. They would just.
- [32:26]
A
They would just give up right there.
- [32:28]
B
They would give up. They would let. They would include the proposal because otherwise they might very well find themselves in a fight with the sec. So that was how things worked up until now. What has happened is that the chair of the sec, Paul Atkins, has basically decided that Delaware law may prohibit shareholders from offering precatory proposals, which is something that you talked about with Kyle Pinder. So he. He has decided that it may be the case that precatory proposals are simply prohibited under Delaware law, and ostensibly because of this, but he's changed the system. Now, if you want to submit a no action, if you want to exclude a shareholder proposal on the ground that it is not a proper subject for shareholder action, which as a practical matter means on the ground that it's precatory and therefore prohibited under Delaware law, the SEC continue to take a position on that. Like it'll get to weigh in and say, yes, my God, you're exactly right. We've always thought that purgatory proposals were illegal and. Or they might actually go to Delaware and ask. But if, if you seek to exclude the proposal on any other ground, then there are two paths. One is that the SEC simply won't say anything, and the other. So you just have to make your own call. You say that you're going to exclude it on such and such ground. The SEC says absolutely nothing. And then you just roll the dice. Or you go to the SEC and you say, I have a really solid legal basis.
- [34:08]
A
Like, really solid. Yeah, really, really solid.
- [34:11]
B
With some kind of, you know, deep, you know, deep lawyering as to why you certify that you think you're correct, that you can exclude it. At which point the SEC will essentially say, on the basis solely of your certification, with no independent research of our own, we will promise. We say, we promise not to take action against you.
- [34:32]
A
Right.
- [34:32]
B
Okay, so couple things about this. First, what kinds. If it's not proper subject for shareholder action, which is the one that they're preserving, they're gonna, you know, basically the
- [34:41]
A
ones that go to Delaware to get some further work on. Yeah.
- [34:45]
B
What kinds of basis for exclusion are we talking about? Very often claims that the shareholder did not meet the formal requirements to submit a proposal. They haven't proved that they hold enough shares. They things they didn't get it in on time, something like that. And then also things like, I saw one that was substantially implemented. That's a basis for exclusion. We already did this thing. Or it's ordinary business. This is just not. This is just. This is just day to day stuff.
- [35:16]
A
And you're trying to tell us what color the CEOs carpeting should be.
- [35:19]
B
Exactly. You're micromanaging the company. Those are independent bases for exclusion. And those are the kinds of things that the SEC is taking this dual path. Either they won't say anything, or if you just, you know, paper it, they'll say on the basis of your certification, we promise not to paper it.
- [35:34]
A
That's the verb I was looking for.
- [35:35]
B
Yeah. So here's my view of that. First, I don't actually see a distinction between those two paths, because legally what the SEC is saying is if you take the paper path, it's promising not to sue you if you exclude the proposal. But if you don't take the paper bath, it's simply saying nothing. Which means the distinction between these two paths is if you don't submit the full attorney certification, you're risking the SEC suing you. Except I don't think that's a risk. They're not going to sue you. They hate shareholder proposals, and they're just not. So I don't actually think that there is a distinction between those two paths. Which means if a company chooses not to exclude a shareholder proposal either with all the papering or not the only risk, the only actual legal risk, legal risk that they are going to endure is that the shareholder themselves sue and say you improperly excluded our proposal. I don't see as a practical matter
- [36:36]
A
of fact, that's not happening.
- [36:38]
B
Well, it's very rare. There are some shareholders though that are well heeled and like the institutions like
- [36:44]
A
the pension funds, some biggies may decide a little bit.
- [36:47]
B
They might because actually they're looking for a fight. So they might sue and companies know that. But here's the thing. The worst case scenario if somebody sues, the absolute worst case scenario from the company's perspective is they say you're right, we will settle and we'll include it. Which is not a penalty. Like there's no real legal risk that I see from the company. They could just exclude everything.
- [37:09]
A
There's no fines and penalties for this. All they're saying is you're going to litigate it. Right?
- [37:13]
B
Everything. If a shareholder sues them, say whoops, you're right and include it and moot the action. So I don't see that a real legal risk here. But they probably, as my understanding, do not actually want to pick a fight with the larger shareholders. They don't want to have, get into it, get into it with the big
- [37:34]
A
pension funds, with, with CalPERS or with the New York fund or whatever.
- [37:38]
B
So those, they'll probably, unless they have a really good basis for exclusion and they probably don't because those are professional enough that if they're submitting a proposal, they, they, they will be doing a, you know, a proper kind, they're not going to want to get into a fight with those guys. So they'll just include those. And then though what that means is the ones who they think are, don't have the wherewithal to really fight, those are the ones that they can exclude I think with very little legal or reputational risk unless they're afraid maybe smaller shareholders will, you know, rally around to the bigger ones or something like that. But like, but so I think companies are in very little legal risk. Their reputational risk may very well be just about managing the big shareholders. And that means we're excluding the proposals of the smaller shareholders. And whether you care about that kind of depends on where you sit. Historically it was always viewed like courts viewed 1488 as like a way for even small, normal, you know, little ordinary retail shareholders to have their say.
- [38:40]
A
Right.
- [38:41]
B
Whether you view that as a value is a separate question.
- [38:44]
A
Is different. Different question.
- [38:45]
B
Yeah.
- [38:46]
A
So, so we, and we already have some evidence of this because there are already six, as I have started to think about them. No objection. Not no action, but six no objection letters.
- [39:00]
B
Ones where they papered it and the SEC said we're not going to take action.
- [39:03]
A
Yes.
- [39:04]
B
Right.
- [39:04]
A
And a lot of those.
- [39:06]
B
Yeah, sorry. Yeah, yeah. But as I said, of those six, some of those are really the technical stuff.
- [39:10]
A
Well, we can summarize those six. So first, the six were all proposals that had been in the no action hopper before this. Right. Okay. So the company just sort of resubmitted or wrote a supplemental letter and said we're, we would like to. You get no action, no objection relief based on this earlier no act. So all the legal arguments for excluding them had already been laid out in the. In the.
- [39:44]
B
But not with this super special. Oh, but these are the ones with the super special certificate. Like enough.
- [39:49]
A
Yeah, right, right.
- [39:50]
B
That accounts. Okay.
- [39:51]
A
Yeah. Okay. So of an. All six were from John Chavet. So there were six corporate governance proposals. And you know, talk about a small individual shareholder who's really unlikely to sue anybody over this.
- [40:09]
B
I don't know. Yeah, I don't know.
- [40:11]
A
No, he's not. I know.
- [40:12]
B
Okay.
- [40:14]
A
I highly doubt it. So of those six, four of them kind of surprised me. Three were requested. No objection. Just based on share ownership, not hitting the 2,000 or 10,000.
- [40:33]
B
Because that kind of thing is really easy. Like, like as a lawyer, it's very easy. They have it or they don't have it. We're done.
- [40:39]
A
It's so. So those, so those three there. Another was because it was a late submission. It was submitted four days after the deadline.
- [40:48]
B
Right. Again.
- [40:49]
A
And those four candidly surprised me a little bit. John's really good as a general rule. So the two others were interesting. You, you refer to this. The two others were based on substantial implementation.
- [41:02]
B
Right.
- [41:03]
A
Which is again, a standard objection or exclusion where a company could say, we've already done what they've asked, we don't have to do anything more. We've not complete implementation, but substantial implementation. One of them had to do with a very, very generalized precatory proposal saying we think there should be straight majority voting and anything that shareholders vote on instead of super majorities and it could be for special meetings, for, you know, bylaw amendments, all kind of stuff. And the company said, well, if you look, if you read our bylaws, that's really what we have. So, you know, you could kind of quibble about a couple of them, but that, so they basically said, we've already substantially implemented this idea that we should have straight simple majority voting. The other one was a precutor proposal to declassify a board, and the company was in the very early stages of doing it. They'd taken some votes already. I. The board wasn't completely declassified, but I think the board in the SEC's eyes would have credibly made enough progress here and they made all the legal arguments that we made enough progress, that it was substantial. But again, it may not necessarily matter because, you know, I'm really wanting, eager to see kind of how weak the papering process can get before the SEC says, okay, we really need to take a closer, closer look at this. And I'm guessing the SEC is not going to really scrutinize this stuff like that.
- [42:33]
B
The distinction is really between the SEC saying we will not take action or saying nothing and. But nothing, nothing. I mean, what theoretically that could mean is that the SEC will, could theoretically take action against you. Except that I just don't think that's on the table with this SEC that
- [42:48]
A
doesn't like this SEC is not going to be take in for.
- [42:51]
B
There's no difference. So I would think from a company's perspective, why risk it with, you know, by staking out your legal position in detail that can be attacked later? I mean.
- [43:00]
A
Yeah, right. Exactly. So anyway, so that is what the ESG proponents have been working on. That's what they're up against and that's what they're thinking about really hard.
- [43:09]
B
Yeah.
- [43:10]
A
This month, unlike me and some of my guys I work with who are thinking about some other stuff. So anyway, so. So yeah, two kinds of activists, two different kinds of settings, two things that to work on in November, December and January. Yeah. So I think that was, that was kind of fun. So we should probably wrap it up. What do you say?
- [43:28]
B
Absolutely.
- [43:29]
A
All right, cool. And we have one more episode. We're going to a special episode, a very special episode for this month. And it's going to be a real special one. We'll let, we'll sort of announce a little later and then we're going to take a break for the rest of the month and go enjoy the holidays. So that's it. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist, investor and advisor to investors about their activist situations. Ann is professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me mike@theactivistinvestor, one word.com and ann@law colorado edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll talk again soon.