WESTLAW - Investors want more frequent company meetings

Thu Mar 17, 2011 6:53pm IST

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WASHINGTON (Westlaw Business) - Birthdays, anniversaries, and annual meetings -- it seems good things only happen once a year. Not all shareholders, however, are content with airing their grievances just annually.

In recent years, there has been a deluge of proxy proposals seeking to empower shareholders to act outside the annual meeting schedule. Citigroup, Corning (GLW.N), and Honeywell are all targets of proposals designed to give shareholders a voice outside the bounds of the annual meeting.

These proposals sometimes unfold as epic battles between management and activist shareholders seeking to assert more control over companies.

The epic tug of war between management and activist shareholders plays out through negotiations, no action letters, and proxy proposals. Shareholder proponents claim that empowering shareholders to act outside the fetters of the annual meeting schedule improves corporate governance.

Proponents and supporters claim the proposals allow shareholders to take prompt, sometimes even proactive, actions and better monitor corporate decisionmaking. Corporations, on the other hand, often argue that special meetings are costly, time-consuming, and empower large minority shareholders at the expense of other shareholders.

Given these opposing viewpoints, it should come as no surprise that boards and shareholders are gearing up to rehash this battle in 2011. Activists are once again submitting proposals calling on companies to grant shareholders the right to call special meetings. Corporations, however, are battling back with no action letters and their own proposals.

In response to these corporate machinations, shareholders are modifying their own tactics and submitting more proposals seeking to authorize shareholders to act by written consent outside of annual meetings.

Shareholder proposals calling for special meetings have been a growing issue since 2008. According to the Manhattan Institute's Proxy Monitor, during the last three calendar years, shareholders of Fortune 100 companies have voted on 64 proposals that sought to permit the owners of a certain percentage of shares to call for special meetings. These proposals are back with a vengeance for the 2011 proxy season.

Many companies, such as AT&T and PepsiCo, have already included proposals to give holders of 10 percent or more of the company's outstanding common stock the power to call special meetings. Other companies, however, are taking it upon themselves either to institute or lower the threshold for shareholders to call special meetings. These proposals tend to have higher thresholds for calling special meetings than 10 percent.

TRICKS OF THE TRADE

Management can defuse special meeting proposals by meeting their shareholders halfway. EMC, for example, is attempting to lower its threshold for shareholders to call special meetings from 40 percent to 25 percent. Interestingly, EMC's proxy statement recognizes that the proposal is at least partially in response to previous shareholder proposals seeking a 10 percent threshold.

Similarly, Weyerhaeuser (WY.N) is seeking shareholder approval to allow shareholders of 25 percent to call special meetings. Notably, a proposal calling for a 10 percent threshold passed at the paper and pulp company's last annual meeting. Shareholders will vote on management's proposal later this month on April 14, 2011.

Other companies also meet their shareholders halfway in an effort to keep their shareholders from ever voting on special meeting proposals with 10 percent thresholds. Waste Management and ITT Corp, for example, recently received special meeting proposals with 10 percent thresholds. Both companies later submitted their own proposals granting shareholders the power to call special meetings.

The catch-22 is that the management proposals generally carry much higher thresholds for requesting special meetings and Rule 14a-8 (i)(9) allows companies to exclude proposals that would directly conflict with management proposals. Waste Management is omitting a proposal calling for a 20 percent threshold for special meetings. Management's proposal calls for a 25 percent threshold. ITT is omitting a special meeting proposal with a 10 percent threshold and substituting its own proposal with a 35 percent threshold. Management, however, has been playing this numbers game for several years now and shareholders are catching on.

An increasing number of proposals are calling for companies to allow shareholders to act by written consent outside of annual meetings. According to the Manhattan Institute's Proxy Monitor, shareholders of Fortune 100 companies have voted on nine written consent proposals during the past three calendar years. 78 percent of these proposals, however, have passed, which is more than double the three year 28 percent success rate for proposals authorizing shareholders to call for special meetings.

Liz Claiborne's 2011 proxy includes a written consent proposal. The supporting statement for the proposal notes that, last proxy season, management watered down a 10 percent special meeting proposal to a 35 percent threshold. Written consent proposals may be more successful because there is no middle ground for management to stake out and run to the no action process with. Later this month, on April 19, 2011, Whirlpool shareholders will vote on the first written consent proposal of the season.

The financial crisis and the following economic malaise brought to life an array of corporate governance issues that have shareholders chomping at the bit to exert greater power.

From the election off-cycle appointment of directors to takeover agreements, shareholders want more power. Special meetings and allowing shareholders to act by written consent outside of annual meetings give shareholders a much greater voice in corporate decision calculus. Critics see these actions as costly and thinly-veiled attempts for activists to take control of the process of making critical business decisions that are typically controlled by the board. The results of these proposals will show how much control ordinary shareholders want over the decisions that companies make.

(Editing by Joel Dimmock)

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