Reeds: Proxy Access Still Needed

ReedsLast Year’s Proxy Access Proposal

Last year I introduced a proxy access proposal at Reeds (REED) calling on the Board to allow 1% shareowners holding for two years to place their director  nominees (up to 24% of the board) on the proxy. It also would have allowed a party of 25 or more $2,000 one year shareowners to place an equal number of nominees on the proxy. Since Reeds had a five member board, the proposal would have allowed for up to two shareowner nominees from two non-coordinating parties.

Reeds hired a law firm to build the case for a “no-action” letter from the SEC based on late submittal but it was on time and the SEC denied the request. Sorry to see our firm waste money trying to keep this item from a vote.

In their Preliminary Proxy Statement, Reeds argued that under my proposal a special interest group could elect a board member who has no holdings of Reed’s stock at all.” (my emphasis) Then they may have looked at their board and realized two of their current directors didn’t hold any stock either, so they dropped that argument when they issued their definitive proxy.

Of course, no “special interest group” could elect a board member, since it takes a majority of shares voted to do that.  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”? The Board’s statement implies that all but inside shareowners are “special interests.” Insiders own about 1/3 of Reeds, so it isn’t surprising my proposal lost last year. However, it did get about 40% of the vote on non-insiders and the two directors who own no shares would have been defeated without insider votes.

This Year’s Proxy Access Proposal

The COO of Reeds resigned earlier this year, as did the CFO. Then the ‘interim’ CFO resigned. I think these resignations, and the failure of management to reach sustained profitability, are signs of a dysfunctional board. Change is still needed at Reeds. Chris Reed can be a better CEO with a board that takes more of a hands-on approach. When I submitted my proxy access proposal this year, it appeared that LoCorr Fund Management LLC was the largest institutional investor, owning about 1.6% of Reeds. ClearBridge Investments LLC, with 0.01% of Reeds total float appears to have the largest investment among  “activists.” It should be evident any move to nominate a director will take a considerable amount coordinated action, even under the thresholds I submitted last year. 

This year, in an attempt to attract more votes, I submitted a proxy access proposal with higher thresholds. This year’s version calls on the Board to allow 3% shareowners holding for at least three years to place their director nominees (up to 20% of the board) on the proxy. It would also allow a party of 25 or more $2,000 two year shareowners collectively holding at least 2% of of the company to place an equal number of nominees on the proxy.  With the current board configuration, that would mean both qualifying groups could nominate one board member each. 

I’m hoping this change will get the endorsement of ISS and Glass Lewis (page 22), since they advise institutional shareowners that own up to 11% of of the shares at Reeds. However, the real key to winning this vote will be to appeal to retail voters, since we can cast the deciding 66% of votes. If you own shares of Reeds, I hope you will support this proposal. My recently submitted proxy access proposal reads as follows: 

Proposal X* – 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 directors hold no stock in REED. Their pay ranges from nonexistent to minimal, giving them little financial incentive to perform. Both would have lost their elections last year without the vote of insiders.

REED stock was priced at $6.82 as of the last annual meeting and as high as $8.57, earlier this year. The exodus of their CFO, an interim CFO and their COO are indicative of greater problems. With the right board of directors, Reeds can reach sustained profitability and will have plenty of room to grow.

Financially committed outside directors with the right experience could provide the necessary leadership to move REED forward.

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 three years, at least three 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 two years 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 two 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 20% of the company’s board of directors. If either group should exceed its 20% 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 three years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for two years 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 enhance shareholder value:  Proxy Access for Shareholders – Proposal X*

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.

I am concerned the Reeds Board is not listening to their shareowners and 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 last year’s 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 last year’s 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. According to the most recent annual report, Mr. Muffoletto received less than $12,000 last year for his service, primarily for chairing the audit committee. Mr. Fischman received only $900 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 $900, 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?

Mr. Harris has 9,363 shares, according to the annual report but received nothing for his board service. While an investment of $50,000 certainly provides some motivation, is it enough to motivate Mr. Harris to work diligently for other shareowners and the company? I am thinking we should probably withhold our votes from him as well. When the proxy comes out, I’ll have more recommendations.

Meanwhile, love the products, watch their new TV ad, and get in touch with me about how we can turn Reeds around to make it a sustainable business. Questions? Email me; I’ll answer.

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