As most readers probably know, the first proxy access campaign was terminated by GAMCO Asset Management Inc. (affiliated with activist investor Mario Gabelli) after their eligibility under National Fuel Gas Company (“NFG”) bylaws was challenged. Since I petitioned for an SEC rulemaking to allow proxy access in 2002 and have been an active filer on the topic, several in the press asked if this is the end. Not by any measure.
GAMCO has indeed had a history of clearly trying to “influence” NFG. I haven’t researched enough to make an independent judgment as to whether or not such prior activities rise to the level of an “intent to change or influence control of the Corporation.” (my emphasis). However, NFG certainly had grounds to seek dismissal.
The language in this provision of NFG bylaws is common. When 14a-11 was promulgated by the SEC, it was designed with the intent that it would not generally be used by hedge funds. Pension and mutual funds that acquire shares in the ordinary course of events, however, would be free to use proxy access to directly influence a board but not to control it. That’s why the rule limited board nominees to 25% of the board.
I don’t think this language will present a problem for most funds. The much more problematic provision being included by many companies is placing a limit on the number of shareholders who can form a nominating group. Although the SEC intentionally placed no limit on the number of shareholders aggregating shares to get to the 3% held for 3 years requirement, a de facto industry standard has arisen limiting groups to 20 members. The Counsel of Institutional Investors (CII) found in most cases 20 of their members would not be able to meet the 3% held for 3 years requirement because they typically hold small amounts in thousands of companies, even though in aggregate CII members hold over $3T. (Best Practices)
Over the course of three rulemaking attempts at the SEC, proxy access was always designed to discourage use by hedge funds. Unfortunately, the typical bylaws adopted by most companies will also preclude use by pension funds. That leaves proxy access to huge mutual funds like Vanguard, BlackRock and Fidelity investing primarily through indexes and modified indexes. However, those funds are largely in competition with each other on the basis of cost. Although proxy access is a low cost option for influencing companies it is not a no cost option. Any money these funds spend on proxy access will come out of their earnings but their competitors will get the same benefits at no cost. I don’t think these large mutual funds have ever even filed a shareholder proposal, so they are highly unlikely to file for proxy access.
So, proxy access does need fixed but we don’t need to fix the provision that knocked GAMCO’s nominee off the proxy, although some tweaking may be advisable in the future. Here’s how GAMCO was reported, first on the Harvard blog by attorneys at Wachtell Lipton and then by Cydney S. Posner of Cooley LLP. Titles are linked.
America’s first proxy access campaign ended this week…
NFG rejected the nomination after concluding that the Gabelli funds did not satisfy NFG’s proxy access bylaw’s customary “passive investment” requirement, which required the nominating stockholder to have acquired its shares in NFG “in the ordinary course of business and not with the intent to change or influence control of [NFG],” and that the stockholder could “not presently have such intent.” The Gabelli funds’ practice of reporting their share ownership on a Schedule 13D instead of Schedule 13G caused NFG to doubt the Gabelli funds’ claim that they lacked an intent to change or influence control of NFG, as did the funds’ public advocacy in 2014 and 2015 for a spin-off of NFG’s regulated natural gas utility business and presentation of a Rule 14a-8 shareholder proposal to that effect at NFG’s 2015 annual meeting (which proposal lost by 82% of votes cast thanks to NFG’s strong shareholder engagement and shareholder-focused practices). The Gabelli funds’ head utilities analyst had recently informed NFG that Gabelli continued to believe the company should be split up. Moreover, the Gabelli funds’ statement in support of their nominee was revised to delete references to the 2015 proposal, despite the originally submitted statement referring positively to the 2015 proposal. In its letter to the Gabelli funds rejecting the nomination, NFG referenced public statements by Mr. Gabelli favoring “financial engineering” at NFG as well as statements by the funds’ representatives that proxy access was an appealing way to reduce the costs of traditional activism.
…The outcome of the first proxy access campaign is a reminder that companies can and should enforce their bylaws against those that try to misuse the machinery of corporate governance.
You probably recall that, on November 9, 2016, GAMCO Asset Management Inc. (entity affiliated with activist investor Mario Gabelli) and certain affiliates used the proxy access bylaws recently adopted at National Fuel Gas Company, an NYSE-listed diversified natural gas company, to nominate a candidate for election to the company’s board at its 2017 annual meeting. It was the first known use of proxy access bylaws to make a nomination. (See this PubCo post.) Well, that drama is now over — and without so much as a skirmish. In this Schedule 13D/A, filed this morning, GAMCO reported that its nominee had “informed GAMCO this morning that he has decided to withdraw [his] name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.” So much for that foray.
What happened? As we previously discussed, Gabelli’s GAMCO Investors has in the past pressured “the company to spin off its gas utility segment from its natural gas exploration and midstream assets.” GAMCO even submitted a shareholder proposal for the company’s 2015 annual meeting, requesting the board to engage an investment banking firm to effect a spin-off of the company’s utility segment, contending that it would help to enhance the company’s underlying value. Not only was the proposal rejected by shareholders by a ratio of more than four to one, it turns out that it was also was a factor in cratering GAMCO’s proxy access attempt. As NFG reported on Friday in this Form 8-K (noted in thecorporatecounsel.net blog), on November 23, NFG delivered a letter to GAMCO rejecting its proxy access nominee for inclusion in NFG’s proxy statement on the basis that GAMCO “has not complied, and is not able to comply, with the terms and conditions set forth in the By-Laws to submit a Stockholder Nominee.” [emphasis added] More specifically, NFG reminded GAMCO that a shareholder seeking to use proxy access must, under the terms of NFG’s proxy access bylaw, make certain representations and warranties, including a representation that the shareholder acquired the shares used to satisfy the proxy access eligibility threshold “in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent.” If the representation were not correct, NFG indicated, the shareholder would not be eligible to use proxy access.
NFG further explained that that particular representation was “derived from the standard under which an investor is required to file a Schedule 13D versus a Schedule 13G….The SEC deems a shareholder to have ‘acquired or [be] holding equity securities with the purpose or effect of changing or influencing control of the issuer’ if, based on relevant facts and circumstances, a shareholder ‘engages with the issuer’s management on matters that specifically call for the sale of the issuer to another company, the sale of a significant amount of the issuer’s assets, the restructuring of the issuer, or a contested election of directors.’” In addition, NFG observed, a shareholder with control intent must file a Schedule 13D, describing any plans or proposals for “control” events such as:
“(b) An extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the issuer or any of its subsidiaries;
(c) A sale or transfer of a material amount of assets of the issuer or any of its subsidiaries;….
(e) Any material change in the present capitalization or dividend policy of the issuer;
(f) Any other material change in the issuer’s business or corporate structure….;
(j) Any action similar to any of those enumerated above. “
Accordingly, based on GAMCO’s past conduct and current actions, NFG’s board concluded that GAMCO possessed an intent to change or influence control when acquiring some of the required shares and that it continues to have that intent. In support, NFG pointed to numerous filings by GAMCO throughout its investment that advocated a spin-off or expressed “disappointment” in NFG’s failure to pursue that strategy “despite GAMCO’s urgings,” including its filings and analyst, press and other communications related to its spin-off shareholder proposal and spin-off strategy, as well as press statements indicating that Gabelli viewed proxy access to be, in effect, an alternative to a “friendlier” approach than — an election contest.
Because these statements were all indicia of control intent, NFG maintained, GAMCO was ineligible to use NFG’s proxy access bylaw. By withdrawing its nominee, GAMCO appears to be unwilling to mount a challenge to that conclusion.
As I noted in this PubCo post, it was especially ironic that the first use of proxy access would be by a hedge fund activist, given that the conventional wisdom has been that these activists were unlikely to use proxy access and would opt instead for more traditional election contests. And this PubCo post discusses the views of several commentators that GAMCO’s tactics and low-cost approach were unusual and that activists were still most likely to engage in more traditional proxy contests. The GAMCO fender bender provides yet another reason that hedge fund activists are unlikely to rely on proxy access: requiring a representation regarding the absence of any control intent is a common provision in proxy access bylaws — indeed, the absence of control intent was a requirement for eligibility under the SEC’s now defunct proxy access rule — and, unless the hedge fund activist has been unusually limited in its demands or unusually circumspect in its communications regarding the target company, it could well run into the same brick wall as did GAMCO.
GAMCO Not Ideal Test Candidate for First Proxy Access
When a lot of investors discussed where we should file first proxy access proposals, many looked back to the civil rights movement, thinking first proxy access proposals should be filed at the worst companies first. The first case should be like Rosa Parks refusing to sit at the back of the bus in Montgomery. Others of us thought best practices in corporate governance would pass from well governed companies to poorly governed companies. In the end, we usually can’t get agreement among all the actors. Just as others had refused to sit in the back of buses, such as Bayard Ruskin, Irene Morgan and Sarah Louise Keys, many proxy access proposal were filed before Scott Stringer took up the cause against selected targets. GAMCO’s use of the first proxy access submission at NFG is just the beginning. Many more will follow and success will come.