Proxy Access Test Drive Hits a Wall

Cydney S. Posner is special counsel in the public companies group at Cooley LLP. This post is based on a Cooley publication, and follows two previous publications on the use of proxy access, available here and here. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

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. Well, that drama is now over—and without so much as a skirmish. In this Schedule 13D/A, filed [November 28, 2016], 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 a factor in cratering GAMCO’s proxy access attempt. As NFG reported on Friday in this Form 8-K (noted in 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; or
  • (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.

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