The Coming Proxy Wars
from
March/April 2002
by Jessica Fourneret
Angry stockholders are already
drawing the battle lines for this year’s round of annual meetings—and
it looks as though a record number of companies will be facing demands
for change. The big issues: executive pay, alternate slates of director
nominees, and poison pills, the takeover defenses that an increasing
number of stockholders want to see repealed. Activists, some familiar
(like longtime boardroom scourge Carl Icahn) and some less so, are
helping to sow dissent, as are institutional shareholders and union
pension funds. Some proxies are asking shareholders to stop companies
from using the same accounting firms for both audit and non-audit work.
The International Brotherhood of Carpenters pension fund, for example,
is after Apple Computer Inc. to make this change.
Here’s a sampling of various other companies that are under fire:
Adair International Oil and Gas Inc.
The Score Group Inc. (Shareholders Committed to Restoring Equity), a Texas nonprofit, wants to “initiate a new business plan for the company,” according to its proxy. A website that the group uses to round up support, www.TruthAboutAIGI.com, recently railed against “a total breakdown of corporate governance due to the absolute control of the board of directors by chairman and CEO John Adair and vice chairman and CFO Jalal Alghani.” The dissidents are calling for a special shareholder meeting to elect new directors and have nominated Houston accountant Charles Close, Houston lawyer Joseph Soliz, and Richard Boyce, the former president of subsidiary Adair Exploration, as candidates for election to the board. Boyce hints at darker things, too. He told Corporate Board Member that he has “evidence that shows bad management and potentially illegal activities,” which his group has turned over to the FBI, the SEC, and other law-enforcement organizations. John Adair doesn’t sound too worried. “Score is simply a group of former employees who are disgruntled and attempting to ruin the company with outrageous allegations against the current management,” he says.
Central Bancorp Inc.
Back in July the Somerville, Massachusetts, bank said in a press release that a group of shareholders had “no sooner acquired 5% of Central Bancorp’s shares, than it decided that the Bancorp should be sold” and “seem to have made the same odd request of other community banks.” Central Bancorp added that this wasn’t the time to sell. The investors concerned—PL Capital, the Financial Edge Fund, Archimedes Overseas Ltd., and a number of individual shareholders—want the bank to eat its words and have told CEO John Doherty in a letter that the company should retract the “false and misleading” press release. They also want the directors who serve as trustees of the company’s employee stock-ownership plan to resign.
The group, which controls 5.5% of the bank, does want it to be put up for sale and is threatening to launch a proxy fight to elect directors who agree. For its part, Central Bancorp has set up a defense, a poison pill that will let current stockholders buy additional stock at a huge discount if anyone purchases more than 10% of the shares. That and the staggered board prevent an easy takeover—but not a messy proxy battle. The company has already resorted to name-calling, although of an arcane kind. The dissenting group, it said in the press release, is an “adverse person,” legalese for “hostile.”
Morton’s Restaurant Group Inc.
Another poison pill is sticking in the craw of would-be acquirer BFMA Holding Corp. Last year Morton’s adopted a “standstill” contract that says that if the Chicago-based steakhouse chain opens its books to a potential buyer, the buyer agrees to wait for three years before it makes an unfriendly offer or launches a proxy contest. Equally poisonous, Morton’s top executives will get enormous golden parachutes if an unwelcome suitor such as BFMA swallows the company. BFMA Holding insists that as a Morton’s shareholder, it shouldn’t be subject to the standstill terms. The conflict has degenerated into something of a food fight, with Barry Florescue, chairman and CEO of BFMA, writing to tell Allen Bernstein, his counterpart at Morton’s, “You and your cronies took actions to depress the share price, granted yourselves a tremendous number of options, and used the company’s desperately needed cash to repurchase its own stock.” Florescue threatens to nominate alternate directors at the annual meeting. “It’s going to get ugly,” says BFMA spokesman Rick Bloom of the event, which usually takes place in May.
Morton’s declined to comment on the BFMA bid. But according to spokesman Roger Drake, “the company is continuing the process of exploring its strategic alternatives, including evaluating a potential sale.”
Stillwater Mining Co.
Providence Capital Inc., a New York City investment firm that says its mission is to “realize values independent of the stock market,” is taking on this miner of platinum and palladium. Jay Hill, Providence’s head of research, thinks the Stillwater board, where five of the eight outsiders are from the mining industry, is incestuous. “You need diversity,” he says. “There are too many cooks from the same kitchen.” Providence is also unhappy that the board has so small a stake in Stillwater’s performance. Each member owns fewer than 1% of the outstanding shares, which were valued at $19.96 each in early January. Providence has demanded in its letter to management that the company add three shareholders to the board, folks who’d have a bigger stake in the enterprise. Hill says his firm also wants Stillwater to gussy itself up to attract suitors. Accordingly, Providence is pushing for a shareholder vote to rescind the poison pill that would award management prohibitively high change-of-control payments. Stillwater did not return phone calls requesting comment.
The First Years Inc.
The maker of baby clothes and other stuff for tots is under pressure to jettison a poison pill that automatically triggers the issuance of a ton of new shares to current shareholders if anyone purchases 15% of the company’s common stock. The defense would dilute a raider’s investment and make a takeover way too expensive. Phillip Goldstein, portfolio manager at the Opportunity Partners LP hedge fund in Pleasantville, New York, is calling for a special stockholder meeting at which investors would be asked to rescind the poison pill. He wants shareholders to kick two of CEO Ronald Sidman’s relatives off the board as well: Evelyn Sidman, the CEO’s 87-year-old mother, and Benjamin Peltz, his brother-in-law. Goldstein also wants shareholders to demand that the board accept any offer for the company that comes in at $15 per share or better (recent price: $12.62). The First Years said its policy was not to comment on these matters.
Toys “R” Us Inc.
Providence Capital Inc. is pushing for a change in the retailer’s bylaws, which are binding, unlike other shareholder votes. (The only exception is the election of directors.) The proposed change would disqualify directors from running for reelection if in the past they’d snubbed shareholders’ votes to rescind poison pills. “There’s something fundamentally wrong when the board of directors of a publicly held company ignores shareholders,” says Providence president Herbert Denton, who threatens to push for new and friendlier directors to take their place. “This is about corporate democracy and shareholder sovereignty.” Directors of other companies who have ignored shareholder demands to kill poison-pill defenses may also face Denton-backed proxies.
Visx Inc.
The licenser of the Excimer laser system used in eye surgery might have had trouble believing its own peepers. Carl Icahn was back. Just before last year’s annual meeting, he dropped his proxy fight to get an alternate slate of directors onto the board. But later he took up the cause again, and he’s now nominating himself and four others for five of the company’s seven board seats. As Icahn originally stated it, his plan was to acquire about 15% of Visx’s common shares and then push for the sale of the company. But when he had 9.9% of them in his pocket, the company adopted a poison pill that would allow current investors to purchase stock at a discount if anybody bought more than 10%. Icahn claims that he and his alternates “will better enhance stockholder value than the current board of directors.” The company hasn’t blinked. “Visx sees Mr. Icahn’s filing as pretty much the same routine as last year,” says investor-relations spokeswoman Lola Wood. She adds, “Mr. Icahn withdrew his proposal due to lack of shareholder support.”
Quepasa.com Inc.
The Scottsdale, Arizona, portal, which provides news, chatrooms, and other services in both Spanish and English, is asking its shareholders to vote for a merger with Great Western Land and Recreation Inc., a privately held real estate development company also based in Scottsdale. Admitting failure, Quepasa’s management says a merger is its last hope and is calling on shareholders to either approve the deal or authorize the board to liquidate the company. But a group of dissident shareholders thinks that Quepasa still has a future as an independent enterprise and is nominating five alternate directors, who’d make up an entirely new board, to take it there. The group claims that Quepasa is “the best Latin technology brand in the world, and has access to the capital necessary to rebuild this business.” The dissidents also question the benefit of the proposed merger, saying that it would yield “a minority stock position in a company which principally markets empty lots in remote desert areas.” Quepasa’s management thinks they’re loco. “The dissident group appears to consist of the last handful of people who believe that Quepasa’s original business plan is viable,” said president Robert Taylor in a letter to shareholders. They’ll meet on February 28 in Carson City, Nevada, to decide.
Apple isn’t the only company whose shareholders have concerns about accounting firms that do both audit and non-audit work for it. Avon Products Inc., Bristol-Myers Squibb Co., Dominion Resources Inc., Liz Claiborne Inc., Manpower Inc., and the Walt Disney Co. face proposals suggesting that different firms do the two types of work.
Executive pay is another hot proxy issue. For example, the Communication Workers of America union fund has proposed that performance-based compensation at General Electric Co. exclude the profits earned by the company’s pension plans. AOL Time Warner Inc. faces a proposal by the shareholder-activist group Responsible Wealth that would freeze the pay of corporate officers during times of significant downsizing—and keep that freeze in place for a year after the layoffs.
