Reeds, Inc fights to deepen its a democratic-free zone through dilutions to strengthen the grip of insiders and by opposing proxy access. They are headed for private control, while keeping the company public. Last year, the founder picked a new board. Is it really independent?
Reeds, Inc (REED) develops, manufactures, markets, and sells natural non-alcoholic carbonated soft drinks in the United States and internationally. Reeds, Inc is one many stocks in my portfolio. ProxyDemocracy.org had collected no votes (company may be too small).
The annual meeting is coming up on September 29, 2017. I would be happy to meet readers, especially Reeds, Inc shareholders, in the vicinity of 13000 South Spring Street, Los Angeles, California 90061 either the evening or morning before the 1 pm meeting. (contact me) Vote today. If you have already voted, you can change your vote. Your last vote will override any previous vote. More than 90% of retail shareholders don’t bother to vote, so think of yourself as voting for 10.
I voted FOR Proxy Access, AGAINST excessive equity compensation, proposed dilution for financing undisclosed transactions, and the related proposal approving a change in control. I don’t think I have ever seen such a bundle of proposals aimed at entrenchment and reducing shareholder voice. See how and why I voted other items below. I voted with the Board’s recommendations 47% of the time. View Proxy Statement via SEC’s EDGAR system (look for DEF 14A).
Reeds, Inc Proxy Voting Guide: ISS Rating
Reeds, Inc Proxy Voting Guide: Compensation
Reeds, Inc provides for a say-on-pay vote only every three years. Shareholders have no vote this year on compensation. However, in reviewing the information provided on Valentin Stalowir’s employment agreement as the new CEO, I am concerned about the following:
- Automatic accelerated vesting if there is a change-in-control. This provides an incentive for windfall profits even if such a change disadvantages other shareholders or even if Stalowir’s employment does not terminate.
- I see no evidence of clawback provisions, stock ownership guidelines, or a required holding period for board members or executives. In their opposition statement to my proxy access proposal, Reed, Inc claims “We have an established record of best governance practices that are responsive to shareholders.” Their idea of what constitutes “best governance practices that are responsive to shareholders” appears to be a very low bar.
Reeds, Inc Proxy Voting Guide: Board Proposals
Reeds, Inc Proxy Voting Guide: Directors
I am concerned about carryover directors. I think they were all picked by Chris Reed last year without the benefit of input from the nominating committee that existed when the Committee to Rescue Reeds challenged one man rule. However, I will give most the benefit of the doubt, knowing they face a difficult situation in any attempt to provide an independent voice.
By way of background:
- 4/19/2017 Chris Reed resigned as CEO and became chief innovation officer. He continues to serve on the board. Stefan Freeman named interim CEO.
- 6/28/2017 Valentin Stalowir appointed CEO and director. Freeman named COO.
- Freeman is not standing for reelection to the board. James Bass and Scott Grossman have been nominated for election as directors.
- After twice reelecting a director who was defeated and opposing my proposal to put teeth into their majority vote bylaw, on 8/25/2017, the board amended the bylaws to require director nominees to resign if they do not receive a majority of votes cast in uncontested elections.
I voted Withhold on Charles Cargile, since he not only is a CEO of a publicly traded company but servers on three public company boards. He is overcommitted. Reeds, Inc will need more of his attention than he has time available. See Who Wins When CEOs Sit on Multiple Boards? Not Investors. Large investors, of which Reeds, Inc has very few, are cracking down on overboarding (Big Investors Want Directors to Stop Sitting On So Many Boards); retail should do the same.
I also voted Withhold on Christopher Reed. We don’t need two inside directors at Reeds, Inc, we need genuinely independent directors… preferably nominated by shareholders, instead of picked by Christopher Reed. Mr. Reed had decades to bring his company to profit and failed. Even without a board seat, he will have substantial influence, since he and his family hold almost 25% of the stock… probably even more if proposed stock plans are approved.
Reeds, Inc Proxy Voting Guide: Item 2, Omnibus Stock Plan
The board seeks approval to issue 3M shares to be available for award to all employees, officers, non-employee directors and consultants. Issues about:
- Excessive cost
- Duration of available and proposed shares exceeds 6 years (expires 9/29/2027)
- Plan permits liberal recycling of shares
- Allows broad discretion to accelerate vesting
- Silent on cash buyout without shareholder approval
Reeds, Inc Proxy Voting Guide: #3, Increase Authorized Stock
The board seeks approval to increase the number of authorized shares of common stock by over 100%, from 19.5M to 40M shares.
The board seeks to implement its growth strategy, attract and retain talent, regain compliance with listing standards before 12/22/2017 and meet an agreement with Raptor/HarborReeds to increase common stock by 5M shares. The reasons for the increase in authorized stock lack specificity and the company has a history of repricing options without shareholder approval. Nonetheless, they need the money to continue in business and to stop borrowing a usurious rates.
Reeds, Inc Proxy Voting Guide: #4, Increase Authorized Preferred Stock
The board seeks approval to increase the number of authorized blank check preferred stock by 400%, from 500,000 shares to 2.5M shares.
The board provides no specifics but appears to want flexibility to take advantage of opportunities that may arise.
On the plus side, such stock could be used to finance growth or acquire other companies.
On the minus side, it dilutes the voting power of existing shareholders and could be considered a back-door poison pill, since it can be issued to parties friendly to management. Very little in the way of specifics are provided and the board admits the stock could be used as an entrenchment devise.
Reeds, Inc Proxy Voting Guide: #5, Issuance of Shares for Private Placement
Reeds, Inc seeks approval to issue 6M shares (39% of shares as of the record date) at a maximum discount of 25% for consideration not to exceed $8M on or before 12/28/2017. The company states it entered into an agreement with Raptor/HarborReeds on July 13, 2017, but provides little in the way of specifics. Reeds, Inc stock price fell 30% from $2.35 on July 13 to $1.65 on July 14, 2017. Since the specifics concerning any specific proposed transaction were not disclosed, the market did not approve. Neither do I.
Reeds, Inc Proxy Voting Guide: #6, Change of Control as a Result of Private Placement
Reeds, Inc seeks prior approval from shareholders of any change of control that could result from the potential issuance of securities pursuant to #5 above. NYSE rules require companies to obtain shareholder approval prior to a change in control.
In my experience, those seeking a change in control often offer a premium to buy out other shareholders or the market signals such a change as positive. In this case, no premium was offered and the market priced the change by cutting the value of stock by 30%.
Reeds, Inc Proxy Voting Guide: #7, Establish Range for Board Size
The board seeks approval to set the range of the size of the board between a minimum of 5 and a maximum of 9 at its sole discretion.
Frankly, I do not know the board’s motivation. They could be expanding the potential number of board seats for entrenchment purposes to block potential dissidents engaged in a contest from gaining a change of control.
Without knowing the purpose and seeing no threatened takeover, I will give them the benefit of the doubt.
Reeds, Inc Proxy Voting Guide: #8, Auditor
I have no reason to believe the auditor has rendered an inaccurate opinion, is engaged in poor accounting practices, or has a conflict of interest. However, Weinberg & Company has served as Reeds, Inc auditors for 8 years. It is time to switch to avoid any appearance of capture or lack of independence. Although when I vote against a committee’s recommendation, I would normally vote against the committee, I have decided not to do so this year for lack of audit rotation, since this is a relatively new stance.
Reeds, Inc Proxy Voting Guide: Shareholder Proposal
Reeds, Inc Proxy Voting Guide: #9, Proxy Access Bylaw Amendments
I submitted this proposal and will speak to it at the annual meeting. The proposal closely follows the 2010 SEC rule requiring proxy access at public companies that was struck down by a conservative DC Circuit Court. The US Chamber of Commerce and Business Roundtable argued the SEC’s cost estimates for implementation were low. Companies would spend considerable sums to keep any shareholder nominees off the proxy.
Since then, more than 60% of S&P 500 companies have adopted proxy access. Out of 13 proxy access proposals going to a vote last year, 13 received majority support. The 1 proposal that failed was at Reed’s Inc, with 33%. The average support for all such proposals, including Reeds, was 66.6%.
The proposal would allow groups of shareholders holding 3% or more of Reeds, Inc common stock held for 3 years to place 2 nominees on the proxy (up to 25% of the board). This would provide direct competition for leadership at minimal cost. The exchange of ideas should drive innovation and lower risk.
Research suggests three women may constitute a critical mass for reframing the decision-making culture of boards. Similarly, having two shareholder-nominated directors may help ensure not only participation on each of the committees but a critical mass for bringing a shareholder perspective to Board decisions. Research also finds that director insulation from removal is associated with lower firm value and worse performance. Proxy access is the surest way to remind directors they can be removed and replaced by shareholders.
However, Reeds failed to provide their opposition statement 30 days in advance of filing their proxy as required by law. Additionally, their opposition statement includes “false and misleading statements,” also prohibited by law. The real “established record” includes:
- not allowing board candidates to be evaluated by the nominating committee.
- not removing a director who failed to achieve a majority vote two years in a row
- opposing my proposal to put teeth in their majority vote bylaw
- no history of a board evaluation process
- no history of a succession plan for CEO position
- failure to notify board or shareholders of voluntary FDA recall regarding exploding bottles of ginger brew or the loss of lucrative contract with Trader Joe’s
- no annual say-on-pay; only such a vote every three years
If there ever was a company in need of proxy access, it is Reeds, Inc.
Reeds, Inc Proxy Voting Guide: Votes Against Board Position in Bold
As mentioned above, Reeds, Inc may be too small to be in the ProxyDemocracy.org database. That also appears true of Egan-Jones and Proxy Insight. I fully expect institutional investors at Reeds, Inc, like Goldman Sachs and Vanguard will vote for proxy access, since they have a record of doing so. However, institutional investors only hold about 13% of the shares. The largest shareholders at Reed, Inc are Christopher Reed, Robert Reed, and Raptor/Harbor Reeds SP LLC with 25% of the vote, not counting other insiders. The Reeds will probably vote. Will other shareholders bother to vote? Stay tuned.
My votes against the board’s recommendations are in bold below.
Reeds, Inc Proxy Voting Guide: Issue for Future Proposals
Looking at SharkRepellent.net for other provisions unfriendly to shareowners. The main outstanding issue is proxy access:
- No proxy access, as discussed above.
- Shareholders cannot call special meetings.
- Blank check perferred stock may also board to create a poison pill or a new series of stock with special voting power.
Reeds, Inc Proxy Voting Guide: Mark Your Calendar
Stockholder proposals for inclusion in our proxy statement: If a stockholder wishes to present a proposal to be included in our proxy statement and form of proxy for the 2018 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 no later than May 4, 2018, which is 120 calendar days before September 1, 2018 – the anniversary date of this Proxy Statement was released to stockholders in connection with the 2017 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 September 29, 2017, 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 2018 Annual Meeting of Stockholders.
Why You Don’t Fail When You Fail with Chris Reed
Even if he fails with Reeds, Inc, Chris Reed views it as a success. That might be a great personal philosophy, but is it one we want to continue to dominate our board?
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. For more on the subject, see CEO Pay Machine Destroying America.