Reed’s Inc: Proxy Score 55

Reed’s Inc: Board Proposals

Christopher John Reed

I voted WITHHOLD for Chris Reed but voted FOR all other nominees. Reed’s Inc would function better without either Mr. Reed or his wife on the Board. With insiders (primarily the Reeds) holding more than thirty percent of the company’s stock and being founder/CEO, Mr. Reed will continue to have considerable influence with all the directors, especially since he appears to have handpicked each one. His presence on the Board would result in a greater chance of his continued domination and mismanagement of the Company.  

As mentioned above, I voted “For” the pay package, most board nominees, “AGAINST’ Chris Reed and the auditor. I also voted “AGAINST” repricing previously issued stock options. Options should not retroactively be repriced. Those options were granted to incentivize performance. Performance goals were not met. Repricing options would simply reward failure.

I voted “For” what the proxy card is calling “Amend Bylaws on Advance Notice Provisions.” I have no idea who cam up with that title. If you look at Appendix B on the proxy, it is clear the amendment pertain to the nomination of directors and would require each nominee to submit “a statement” concerning “whether such person, if elected, intends to tender, promptly following such person’s election or re-election, an irrevocable resignation effective upon such person’s failure” to obtain a majority vote.  Although, I believe the intent is to secure a resignation from all directors that fail to obtain a majority vote, the bylaw actually only requires a statement of their intent, which apparently could be one way or the other. During this past year, I sent the Company links to several articles on majority voting requirements and even some suggested wording. The proposed amendments are so muddled as to be practically useless. At least the Board’s intent is clearer in their recommendation of proposal 4. I will vote “For” and will make another attempt to get better language, which should also include a carveout so that proxy contests are decided by a plurality vote. See a discussion on the topic by the Council of Institutional Investors.

Company: Shareholder Proposals

CorpGov Recommendations: Votes Against Board Position in Bold 

I am voting early this time because the Reed’s Inc Board is apparently giving its shareowners as little time as possible to vote. Proxy Insight had reported no additional votes but may do so within the next week or so. Maybe I will come back later with an update

Reed’s Inc: Interesting Revelations in the 2016 Proxy

Daniel Muffoletto

• Page 9: “Other than Director Dan Muffoletto, who has indicated that he does not support certain of the board’s nominees, no director has informed the Company in writing that he or she intends to oppose any action intended to be taken by the Company at the Annual Meeting.”

I wonder which board nominee(s) Mr. Muffoletto opposes? Perhaps we will find out at the annual meeting. Although I recommended AGAINST Mr. Muffoletto in prior years, he was the only director I met at annual meetings (aside from Mr. Reed) and was the only one who appeared responsive to suggestions for possible improvements in corporate governance. From prior year votes it is clear Mr. Reed voted against Muffoletto. Since Reed seems to have had total control over the Board, apparently even summarily dismissing a director without so much as a Board meeting, it is surprising Muffoletto has lasted as long as he has. My sense is that Muffoletto’s unconventional approach and knowledge were an overall positive influence.

• Page 12: If my interaction with Mr. Reed is indicative of the rest of the “BACKGROUND OF THE SOLICITATION,” I would retitle that section “Fantasies.”
• Page 13: “Election of either the board’s nominees or the Committee’s Nominees will represent a change of control of the Reed’s board. As a result, stock option grants to purchase 240,000 shares of common stock that are subject to the 2015 Incentive and Non-Statutory Stock Option Plan will be accelerated. These option are not subject to the re-pricing resolution set forth in this Proxy Statement and are currently priced above market value.”
• Page 13: “In addition, Reed’s term loan, line of credit and capital expansion loan with PMC Financial Services Group, LLC (“PMC”) in the aggregate amount of approximately $10.9 million are subject to the condition that PMC must approve any replacement of the President, Chief Executive Officer or Chief Financial Officer within 30 days. Otherwise, an event of default would be triggered under the loan documents.”

I’ve never seen anything quite like this in any other proxy. Reed’s Inc. here declares that election of their own nominees will represent a change in control, resulting in the acceleration of stock options. With legal interpretations like that, it is no wonder our stock is being diluted at every turn.

The second paragraph is also incredible. It appears Reed’s Inc is so much in debt that its creditor gets to approve officer replacements. Or maybe this is one of those deals one friend makes with another to ensure their job. If the provision was really driven by PMC, why just reserve approval of the CEO and CFO when the SVP of Sales makes more than either and the COO makes more than the CFO? If I were an investigative reporter, I’d look for personal links between PMC and the CFO. Have Lewis Jaffe or any of the board nominees looked into the terms and background of the contract?

• Page 20: In opposing proxy access, the Board notes the following: “We have an established record of best governance practices and are responsive to shareholders.”

Three of the four “best practices” listed are federal requirements. The fourth brag is for their “majority voting” standard, which fails to include a requirement that directors submit their resignation and fails to include a carveout for plurality voting in the case of contested elections. Reed’s Inc. has far from “best practices” in corporate governance.

• Page 21: “During the 2015 fiscal year, members of the board of directors met 14 times in various meetings. A majority of the directors and a majority of the independent directors attended all meetings. Each member of a committee of our board attended at least 75% of their respective committee meetings during the period of service.”

It would be interesting to learn how many times the board actually met face-to-face, instead of by telephone. Such meetings discourage side conversations and can mores easily be dominated by the Chairman.

• Page 23: “During 2016, the Company’s non-management directors, all of whom are considered to be “independent” as defined under the listing standards of the NYSE MKT and within the meaning of the Sarbanes Oxley Act of 2002, Section 301(3), were provided with the opportunity to meet in executive sessions of the board in which management directors and other members of management did not participate. At each audit committee meeting, the independent board members are afforded time to ask questions of the auditors and/or hold private discussions without the Company management present.”

Although they were provided the “opportunity to meet in executive session” did they actually do so, in compliance with NYSE rules? Section 303A.03 Executive Sessions includes the following requirement (my emphasis):

To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management.

Reed’s Inc: Issues for Future Proposals

Looking at SharkRepellent.net for other provisions unfriendly to shareowners (unfortunately, SharRepellent does not yet cover Reed’s but this is what they might say if they did):

• No action can be taken without a meeting by written consent.
• No right of shareholders to call a special meeting.
• No shareholder right to proxy access.
• Supermajority vote requirement (80%) to amend certain charter provisions.
• No enforceable majority vote standard for directors.
• No carveout for plurality vote for directors in case of contested elections.

Reed’s Inc: Mark Your Calendar

If a stockholder wishes to present a proposal to be included in our proxy statement and form of proxy for the 2017 Annual Meeting of Stockholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC and namely, Securities Exchange Act Rule 14a-8. One of the requirements is that the proposal be received by our Secretary by no later than 120 calendar days before November 14, 2017- the anniversary date of this Proxy Statement was released to stockholders in connection with the 2016 Annual Meeting. If the date of next year’s annual meeting is changed by more than 30 days from the anniversary date of this year’s Annual Meeting on To be determined, then the deadline is a reasonable time before we begin to print and mail proxy materials. Proposals we receive after that date will not be included in the proxy statement for the 2017 Annual Meeting of Stockholders.

We urge stockholders to submit all proposals by Certified Mail – Return Receipt Requested. Stockholder proposals should be sent to 13000 South Spring Street, Los Angeles, California 90061, attention: Judy Holloway Reed, Secretary.

Warnings

Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime).I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003.

Few firms admit to having average executives. They generally set compensation at above average for their “peer group,” which is often chosen aspirationally. While the “Lake Woebegone effect” may be nice in fictional towns, “where all the children are above average,” it doesn’t work well for society to have all CEOs considered above average, with their collective pay spiraling out of control. We need to slow the pace of money going to the 1% if our economy is not to become third world. The rationale for peer group benchmarking is a mythological market for CEOs.