Reeds Inc. (REED): The Case for Proxy Access & How I Voted

ReedsIn mid-July I e-mailed investor relations at Reeds Inc. $REEDGojiGinger_Kombucha ( asking if REED had a classified board or plurality requirements for director elections. Can shareowners call a special meeting or act by written consent? What supermajority requirements are in place re M&A or other actions? No response. This surprised and disappointed me since they were prompt in answering previous e-mails: Make kombucha; we’re already working on it. Try one with coconut water and ginger; good idea. Where can I find Reeds Kombucha in Sacramento?; here’s a list.

According to FactSet Research Systems, “insider/stake ownership” at REED is 33.5% of the company’s float. Being almost a controlled company, maybe they don’t feel the need to respond to inquiries from ‘outside’ shareowners about the firm’s corporate governance.  They not only didn’t answer me, they blocked me from following their Twitter feed. Maybe management and the current board think the less outside shareowners know, the better for them?

Reeds is so small it is hard to get much information from the usual sources. doesn’t list Reeds and neither or GMI had much,  although both did have some useful information. For example, I was able to learn that two out of five of the directors at Reeds don’t hold any stock at all in our company (information also available in the proxy). That’s not a good sign. If they don’t believe in our company enough to invest in it, why should we?

Frustrated, I used to test the waters for a proxy access proposal with other shareowners. I got a positive response, so went ahead and submitted the following proposal.

 Proxy Access for Shareholders

WHEREAS, Reeds, Inc. (REED) has a great product line but sustained profitability continues to be elusive even as revenue grows.

Two out of five of our directors hold no stock in Reeds. Directors in our company should have considerable skin in the game. If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second.

Financially committed board members with the right experience could provide the necessary leadership to move forward, benefiting our company, its shareowners and employees, as well as the consumers of our company’s products.

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our governing documents to allow shareowners to make board nominations as follows:

1. The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b.  Any party of shareowners of whom 25 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

2. For any board election, no shareowner may be a member of more than one such nominating party. Board members and officers of the Company may not be members of any such nominating party of shareowners.

3. Parties nominating under 1(a) may collectively, and parties nominating under 1(b) may collectively, make nominations numbering up to 24% of the company’s board of directors. If either group should exceed its 24% limit, opportunities to nominate shall be distributed among parties in that group as evenly as possible.

4. If necessary, preference among 1(a) nominators will be shown to those holding the greatest number of the Company’s shares for at least two years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000.

5. Nominees may include in the proxy statement a 500 word supporting statement.

6. Each proxy statement or special meeting notice to elect board members shall include instructions for nominating under these provisions, fully explaining all legal requirements for nominators and nominees under federal law, state law and the company’s governing documents.

Vote to protect and enhance shareholder value.

REED apparently hired a law firm to request a “no-action” letter from the SEC based on late submittal. It also appears, neither REED nor their attorney read last year’s proxy, which clearly specified the deadline. The SEC denied the request.

I was sorry to see our company waste our money and their effort trying to keep us from even being able to vote on a proposal to allow shareowners to place our director nominees on the proxy. However, that was nothing compared to how baffled I was when I read the following in the Board Recommendation portion of their PRELIMINARY PROXY STATEMENT on page 13 (my emphasis):

Under this proposal, a special interest group could elect a board member who has no holdings of Reed’s stock at all.

Of course, no “special interest group” could elect a board member; only shareowners could do that, and any shareowner nominee would have to win more votes than a candidate nominated by the board.  If they did, could they really be considered as representing a “special interest group”? Their statement seems to imply that all but inside shareowners are “special interests.”

The second and third sentence of my proposal, which Reeds received on August 16 (well before the due date of August 23) reads as follows:

Two out of five of our directors hold no stock in Reeds. Directors in our company should have considerable skin in the game.

Obviously, I think it is important for directors to own stock in companies where they are board members. By its preliminary proxy statement (filed on November 12, Reeds apparently agrees, since they express concern that passage of the proxy access proposal could lead to “a board member who has no holdings of Reed’s stock at all.”

If our Board is so concerned about directors owning stock, why do they keep nominating the two out of five directors with “no holdings of Reed’s stock at all”?Kombucha-Nutrition

The people at Reeds obviously know how to make excellent products but they don’t seem so good at getting products placed and they are even worse when it comes to communicating with shareowners. As SEC Chair Mary Jo White recently told those attending the 10th Annual Transatlantic Corporate Governance Dialogue:

When shareholders have the ability to scrutinize a company’s corporate governance practices, they can help to identify areas of improvement.  But, this only happens if the board and management invite shareholder engagement and actively consider the interests of the shareholders they serve… it is important that the board and management listen to what their shareholders have to say and adjust their governance practices when warranted.
Reeds has made no attempt to answer my initial questions concerning their corporate governance practices. Two of five board members still own no stock, even though Reeds has acknowledged that is a problem. So, what else do we know?  According to information obtained from GMI Analyst (top level bullets below):
  • During the current accounting year, Reeds amended previously filed 10-K financial statements twice. Those restatements could indicate serious problems or could be of a more benign nature.
  • The chairman of the board is also the CEO of the company. Directors are the elected representatives of shareowners. How can they be vigilant in overseeing management if they are headed by management?
    • As Intel’s former chair Andrew Grove stated, “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the DEO, or is the CEO an employee? If he’s an employee, he needs a boss, and that boss is the Board. The Chairman runs the Board. How can the CEO be his own boss?”
    • Numerous institutional investor recommend separation of these two roles:
    • A survey of 400 Board members by Sullivan & Cromwell LLP found that approximately 70% of respondents believe the head of management should not concurrently Chair the Board.
    • Chairing the Board is, or should be, a time intensive responsibility. A separate Chair enables the CEO to focus on managing the company and building effective business strategies.
    • GMI finds it’s actually cheaper to separate the CEO and the Chairman. Companies with a separate CEO and chair provide investors with five-year shareholder returns that are nearly 28 percent higher than those helmed by a party of one. (Time to Split the Chairman and CEO Jobs, Compliance Week, September 6, 2012)
  • Selling, general, and administrative (SG&A) expenses at Reeds are less than half industry average. I would think they would be higher, since such costs generally go down with higher volume sales. According to GMI, comparably low SG&A expenses can be “a red flag for expense recognition issues. Management may manipulate these expenses in many ways: through the intentional underaccruing of expenses; by offsetting the expenses against operating expenses in one of the liability ‘reserve’ accounts or by capitalizing SG&A expenses (on the Balance Sheet) instead of recording them as operating expenses.” Hopefully, that is not the case at Reeds but we don’t know.
  • For the nine months ended 30 September 2013, revenues increased 25% to $27.7M. Net loss applicable to common stockholders totaled $868K vs. income of $303K. Revenues reflect an increase in demand for the Company’s products and services due to favorable market conditions. Net loss reflects delivery and handling expense increase of 59% to $2.9M (expense), selling and marketing expense increase of 34% to $3M (expense).

I am concerned the Reeds Board may not have the ideal mix of experience and independence. If we pass proxy access, I can imagine one or two candidates nominated by shareowners that may have more relevant skills and experience. As a minority of the Board, they would have to convince incumbents of the merits of any new ideas in order for any of their motions to pass, so it would in no way be a takeover… it would be an infusion of new talent. Reeds current Board is comprised of:

  • Christopher J. Reed, CEO/Board Chair and founder
  • Judy Holloway Reed, Secretary and wife of Mr. Reed
  • Mark Harris, an independent director and retired “venture capitalist” with experience in biotechnology.
  • Daniel S.J. Muffoletto, an independent director and naturopathic physician with experience in sales and marketing. Mr. Muffoletto owns no shares at all in Reeds, Inc according to page 23 of the proxy.
  • Michael Fischman, an independent director, CEO chief executive of the APEX course, and a founding member of the Art of Living Foundation. Mr. Fischman owns no shares at all in Reeds, Inc according to page 23 of the proxy.
With regard to the proxy, I recommend voting against Mr. Muffoletto and Mr. Fischman. Without at least some investment in our company, they have little incentive to be diligent board members. Mr. Muffoletto receives $12,096 a year for his service, primarily for chairing the audit committee. However, Mr. Fischman received only $750 for his service as a board member. It is no wonder that, according to the proxy, “during 2012 Michael Fischman attended less than 75% of the aggregate board meetings and committee meetings held” (page 14 of the proxy). Preparing for and attending 10 board meetings is a lot to ask for $750, and that doesn’t count committee meetings. With nothing invested in Reeds and so little pay, can anyone really expect these two directors to spend much effort reviewing and advising management?
I also recommend voting against item #4, which seeks shareowner approval of a say-when-on-pay only once every three years. See Council of Institutional Investors Policies on Corporate Governance, page 12, item 5.2.
Advisory Shareowner Votes on Executive Pay: All companies should provide annually for advisory shareowner votes on the compensation of senior executives.
Shareowners shouldn’t have to wait three years to advise our Board on its pay policies and practices. That’s too long to ensure accountability.
Of course, I recommend in favor of my own proxy access proposal, item #5. Below, I address the key portions of the Board’s opposition statement.
  • The proposal’s threshold of 1% ownership is unreasonably low; it provides proxy access to shareholders with an extremely limited economic interest in the Company who may not be long-term owners. Moreover, the proposal disfavors shareholders with more meaningful economic interests by specifically excluding 5% or greater shareholders.

The ownership threshold of 1% is about $850,000 worth of Reeds common stock, a substantial amount, with holding terms of between 1 and two years. 5% holders were not included, since activists that accumulate that much can and should use the normal proxy solicitation process generally used when trying to wrest control of the Board. The proxy access proposal was designed to give shareowner nominees access, not control. In fact, nominating shareowners are prohibited under the terms of the proposal, from coordinating with each other in their campaigns to obtain a board seat. Under my proxy proposal, two parties of shareowners would be able to nominate one director each.

  • The proposal’s low ownership threshold could result in proxy access nominations that represent only the interests of the nominating shareholder. This could result in the election of “special interest directors”. The low thresholds could also result in the inclusion of numerous proxy access nominees in the Company’s proxy materials, making the nomination and election process unwieldy, confusing and uncertain for our shareholders. 

“Special interest” directors cannot be elected. Shareowners would only be able to nominate one or two directors. To win, they would have to obtain more votes that candidates nominated by the Board. Assuming insiders vote their 33.5% of shares in favor of Board nominees, those Board nominees would only need about 16.5% of the vote of “outsiders,” people like me and you. If they can’t get 16.5% of our vote, Board nominees would be the real “special interest directors,” looking out for their own interests, rather than all shareowners as their fiduciary duty requires. For shareowner nominees to win, we would need more than 83.5% of the shares held by outside shareowners, hardly a “special interest.” Even if two parties nominated the maximum of one director each, that would mean shareowners would vote for up to five of seven candidates listed on the proxy, hardly “unwieldy” or “confusing.”
Standard rules of procedure, including Robert’s Rules, allow any member of an assembly to nominate. This reflects the philosophy that, although the majority decides, all should be encouraged to participate and to be heard. The challenge should lie in the election, not the nomination. My proxy access proposal is designed to ensure that long-term shareowners could participate through one of two tracks. One track—mostly suited for larger institutional shareowners— allows any group of shareowners that has continuously held 1% of the company’s stock for two years to nominate. The other—more suited to individual shareowners or smaller institutional shareowners—allows any group, 25 of whose members satisfy the Rule 14a-8 eligibility requirements for shareowner proposal submission, to nominate.

My reasoning is that shareowners with a demonstrated commitment to holding a substantial stake in our company will be motivated to nominate quality candidates for its board, as will shareowners who must invest considerable effort to nominate. Getting 25 shareowners to agree on a candidate and coordinating efforts to win a board seat won’t be easy.

Changes in control should generally be pursued through independent proxy solicitations, not through proxy access. My proposal ensures this through a variety of impediments that make it an unattractive alternative to an independent proxy solicitation for such purposes. For example, each nominating group is limited to one nomination at Reeds. Multiple parties are prohibited from coordinating efforts. Unlike either typical control or short-slate contests, proxy access would allow split votes, further reducing the likelihood of capture by any “special interest,” including entrenched incumbent boards who may primarily be representing inside shareowners.

Still have questions? Email me; I’ll answer.


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