Unless you are one of the 33 Chilean miners that were trapped underground for the past two months, you have likely been watching the drama unfold on Capitol Hill as the Business Roundtable and the U.S. Chamber of Commerce challenged the legality of the SEC’s new proxy access rule 14a-11, which allows qualifying shareholders to nominate directors for election at shareholder meetings and requires the corporation to include those nominees in the standard proxy statement. The petitioners claim that the new rules are subjective and violate federal and state law and the United States Constitution, and that the SEC did not assess the effect of the rules on efficiency, competition and capital formation. As a result, implementation of the rule has been delayed pending a resolution of the Court of Appeals. So the new proxy access rules will most likely not be implemented until the 2012 proxy season, at the earliest. Upon hearing this news, public corporations across the nation let out a collective sigh of relief.
You weren’t worried? No activists of concern in your shareholder base? Look again. Here’s the scary part: that list of shareholders you are looking at isn’t real-time and there could already be activists accumulating shares and running a fine tooth comb through your corporate governance structure. What’s worse, some large institutions are “disguising” themselves by partnering with lesser known firms who carry out the dirty work, to avoid damaging their reputation and being labeled an activist.
So the question you need to ask yourself today is: are you ready for shareholder proposals or a full-blown proxy contest? Whoever is in charge of investor relations at your corporation needs to take this opportunity to assemble a team of professionals ready to support you in the event of a proxy contest, as well as develop a strategic crisis communication plan. Once you receive that letter from an activist shareholder requesting a change, it becomes a race where they have already taken the lead, and history shows that activists are quick to the draw.
Here are some “tricks” of the trade that you can implement to prepare your company for a potential proxy contest.
- Educate yourself on the proposed Rule 14a-11. Skadden, Arps LLP & Affiliates provides a useful summary of the Rule here.
- Start due diligence to select a high-quality stock surveillance firm. You may be able to get some free trials, which will allow you to compare the results of several firms before you decide who will be best to engage.
- Get references for a reputable outside counsel. You will want to engage a firm that has a successful track record in mitigating proxy battles. Tip: this is not a decision for which you will want to bargain shop.
- Engage a crisis communication/IR firm. Chances are this is your first proxy contest. Crisis consultants are involved in several each year and have gained invaluable experience along the way. They will provide you with advice and guidance to prepare you for what to expect and for developing your strategic communications plan to keep you ahead of the dissidents.
- Sit down with your inside corporate counsel and review your governance bylaws. Take a look at your past Institutional Shareholder Services (ISS) reports. Identify when they recommended shareholders withhold their votes and find out what you can do to resolve their concerns and overturn the recommendation. Your goal should be to improve your Governance Risk Indicators, formerly known as your CGQ® Rating.
- Solidify relationships with your top 20 shareholders. You should be doing this anyway, but it still needs to be said. Make an extra effort to build your relationships with any firm that holds at least 1% of your shares outstanding and schedule regular meetings. Ensure that you know what their concerns are. Also, find out how their proxy voting is handled. Are the analysts and portfolio managers involved, or is it strictly on the compliance side?
Despite the fact that proxy access Rule 14a-11 has been temporarily stalled, you should start putting together your strategy now (if you don’t have one in place already). Many activists will continue to launch proxy battles under the traditional methods now and even after the rule is passed. Heed this advice, and when you get that knock at your door, you will be better prepared to face whatever “monsters” lurk behind it…failure to prepare will result in your company handing out all the “treats” the activists demand!
Maureen Wolffis President & Partner at Sharon Merrill and has 25 plus years experience in investor relations and crisis communications. Maureen has served as a strategic advisor on a number of proxy contests. The firm has significant experience in the capital markets, and is known for its ability to become experts in its clients’ businesses.