July 2023

Chris Clark conducts interviews with leading corporate directors and subject matter experts for Stuart Levine & Associates, a global consulting and leadership development company. The Planet Governance™ interview series features the views of corporate directors, chief executives, and governance experts on timely issues from succession planning, board refreshment, and board composition to cyber-resiliency to stakeholder activism.

This investment advisor and director says the universal proxy card is not solely a boon for activists.

Andrew E. Shapiro is President of Lawndale Capital Management, an investment advisor of small/micro-cap activist/relational hedge funds for three decades. Mr. Shapiro has also served as Board Member, Officer, Advisor/Consultant to many corporate and non-profit boards as well as corporate debt and equity bankruptcy committees. His most recent public company board level work was as Chairman of the Official Equity Committee in the Premier Exhibitions/RMS Titanic bankruptcy. In addition to his public company engagements, Mr. Shapiro is presently serving as Board Advisor/Observer to early-stage startups, VideoXRM and Miravel Inc.

Mr. Shapiro is a Board Leadership Fellow of the National Association of Corporate Directors and was selected to its NACD Directorship 100. He is also a member of the Private Directors Association, and an Associate Member of the Council of Institutional Investors on whose Corporate Governance Advisory Council he presently serves.

Andrew E. Shapiro

Chris: Andrew, given your unique perch as both investment advisor and board member, what is your latest view on the universal proxy card?

Andrew: First, to summarize the universal proxy card (a.k.a., “UPC”) for your audience. It’s possibly a different summarization than from others. The SEC mandated UPC rules now harmonize all onto one ballot – a universal proxy card – what was previously a differentiated and siloed slice of director candidates for most shareholders, the ones that vote by proxy rather than attending annual meetings in person.

The Pre-UPC voting process limited proxy voters to choose from either the issuer’s nominees on the issuer’s proxy card or the activist’s alternative slate via the activist’s different proxy card. Since ISS and Glass Lewis don’t want to be responsible for a change of majority control in the boardroom that goes wrong, they have a very high threshold to ever recommend so many alternative slate nominees that would comprise a majority of the new board. They almost always recommend splitting votes amongst each side’s candidates. Before the new UPC rules, as a matter of practicality, most shareholders, faced with choosing candidates solely from one side’s proxy card over the other, were not voting for their optimal desired combination of director nominees.

Chris: Right.

Andrew: Please note that shareholders who attended the annual meeting in person always had a choice from a single combined list that included all properly nominated candidates. The new UPC rules now simply enable and replicate that broader choice for all shareholders who vote by proxy. The new rules were crafted with input from both issuers and shareholder advocates, and the SEC’s final rules provide some sugar, as well as some salt for both sides of proxy contests. Thus, I wouldn’t say that this improved system is a boon for activists or issuers and solely at the expense of the other.

Chris: You said, not a boon?

Andrew: It’s not solely a boon for activists, and it’s not solely a boon for issuers. The new rules have something for everyone, depending on your goals. In some instances, UPC tips the scale for some alternative candidates, but it also strengthens the incumbent’s goal of avoiding a majority change of board control. 

Andrew: I believe the UPC rules lower costs for a challenger nominating alternative director candidates. That doesn’t mean a challenger won’t spend the money they used to spend because they still need and want to win the proxy contest. But, to mount a campaign, which is different than winning, the cost to a challenger, I believe, have been lowered. Recall that because of the new rules, each side’s proxy card now must include all properly nominated candidates, regardless of who nominated them. Typically, the issuer (due to deeper funding pocket borne by all shareholders) produces and sends out multiple mass mailings of proxy cards, which now include the alternative slate’s nominees, to shareholders that the contesting shareholder might not have otherwise reached with a limited cost campaign. Basically, the challenger’s list of alternate nominees gets distributed within the issuer’s proxy mailings. The challenger, if it wants to increase the chance of winning still must spend and get the word out about what its campaign and alternative list of nominees is all about.

To utilize UPC and get alternative nominees included on the company’s proxy card and its mailings, the new rules require the activist nominator to commit to a minimum level of its own solicitation efforts, which was not required before. Now, if an activist or a nominator doesn’t want their nominees on the issuer’s card, they don’t have to adhere to do any of this stuff. 

There have been only a few UPC campaigns that have really gone to the vote, and one of them is a recent campaign called Zevra Therapeutics (NasdaqGS: ZVRA). In this instance, Dan Mangless, a longtime individual shareholder. (I’m highlighting this as someone who is not a professional activist) He’s more like a reluctivist, i.e., an investor reluctantly becoming active.

Chris: Thanks for the clarification.

Andrew: He put up three candidates on a seven-person board. He won the votes cast by a wide margin. Frankly, as an ironic aside, there was concern whether a quorum would be achieved. The company spent a ton of money with well-known and costly advisors – and made 12 separate proxy filings. Mangless used less costly advisors and filed only a preliminary, revised, and final proxy. He had a simple g-mail account, no campaign website, no press releases, but for a single shareholder letter that stated a simple direct case repeated in his proxy filings, all for a fraction of the cost.

Chris: Andrew, what type of ballpark savings are you talking about?

Andrew: It’s estimated that $600,000 was spent by this small cap issuer. The filing documents from Mangless was estimated at $250,000, although I bet it would’ve been less costly had he not won, because many of his advisors charged a certain fee if he lost but they also had a success fee. The costs that he estimated were assuming success, and in this instance, success did take place.

Now, note that a proponent still wants to or needs to win, so a compelling case needs to be made and presented to win the majority of the shares voted. Mangless’s threadbare campaign failed to win the recommendation of either of the big proxy advisors, ISS, or Glass Lewis, who both recommended for all three incumbents due to Mangless’s challenge being “thin on detail.”

Victory was achieved in electing all three alternative nominees due to substantial dissatisfaction in the shareholder base as indicated by the very high withhold vote count against incumbent Zevra directors that had occurred in recent years, a smaller number of institutional shareholders who might subscribe to following one of the proxy advisor services due to Zevra’s small market capitalization size, and a very low turnout at this company’s annual meeting.

Andrew: Ironically, Zevra Therapeutics, which initially wanted to bring in voters, at the end, perhaps would have been better off had a quorum to open the meeting not been achieved.

Further explaining my “sugar and salt” example of outcomes from UPC — short slates now are more likely to succeed, while electing majority change has become even less likely than before the new UPC rules were adopted. This is because investors, especially those who aren’t following ISS and Glass Lewis, are now able to optimally split their proxy vote choices. Whereas, before UPC, if the investors were upset enough that they wanted to support the challenger but didn’t really want full change of control of the board, they would still vote the activists’ blue card. Change of control could more easily occur because it was an either/or vote situation. If you don’t attend the meeting, a shareholder had to vote with either one card or the other.

As a result, there was a greater chance the control slate could get elected if the activist were making any nominations. Since the activists were spending this money anyway, they were going for broke to win enough votes to elect their slate – it would be for their full slate. A common strategy is threatening a control slate and achieving a settlement for a minority slate. I feel, as proxy voters can now mix and match as they individually view the optimal board composition, short slates are more likely to succeed as having some alternative nominees elected is much more favorably received by both shareholders and the independent proxy advisor services. I think this also means having a change in the majority of the board is even less likely. Hence why I consider UPC as “sugar and salt” for activists and issuers in this instance.

Chris: Regarding that other side of the coin for the incumbents, is that a bit of a surprise?

Andrew: Regarding the incumbents, the fact that you’re not going to see a control slate elected and you’re only going to get a minority of the board filled by alternate nominees, one could argue that settlements are actually less likely because the issuer is not at risk of having a control lost and is more likely to only cede seats to a few of the challenger’s nominees. Some speculate that it might motivate issuer boards to harden their stance on a settlement. Whereas, if there was a chance of a control slate, you would settle more rapidly in order to limit change to a minority slate under the theory why settle for a minority slate if you have a chance of making that minority even smaller?

I don’t agree with that premise but I’m just detailing both sides of the coin for you. I think net-net settlements are going to come about more frequently for the following reason — the list of nominees is all on a single proxy, and people are mixing and matching and choosing the optimal slate of directors, the incumbent directors are all looking over their shoulder and across their boardroom at their fellow incumbent and legacy directors hoping that they are not the nominee at the back of the herd. No one wants to be at the back of the herd and recommended against being picked off by the lions or voted off the island.

Chris: Indeed, it is a huge incentive.

Andrew: You’ve got members of the board saying, “Let’s just settle. They’re going to get a minority anyway. Let’s give them a minority now, figure out who we determine is not going to remain on the board, but it’s structured in a manner that’s mutually agreed upon.” Perhaps this will also motivate settlements to occur even before the public nomination of a fight surfaces because once the public nomination of a fight occurs, one is going to perceive that those directors leaving the board perhaps were counseled out as a result of the settlement. However, it’s a lot less embarrassing if some directors orderly retire from the board and choose not to stand for reelection, and other new directors are added, all before a public nomination takes place. In fact, if the board can build enough trust from the activist in the settlement, the undisclosed settlement could result in the expansion of the board with the activist nominees followed by the “ousted” legacy directors not standing for re-election at the next meeting shrinking the board back down to optimal size. This might also enable the transfer of institutional knowledge from the outgoing directors if that knowledge has any value.

Those directors leaving the board in this face-saving manner, especially if they want to have a continuing career in board service, don’t have the taint of having been voted off the island. Once you’re voted off the island, it’s quite possible that future board service becomes more problematic in the public company forum. 

Chris: Andy, let me ask you this, so the effect of what you just said, will it take a few months to fully occur, or will it take a year or two?

Andrew: I think it’s evolving. I think what’s beginning to happen is going to increase. We’ve had some contests this year. Yes, UPC got adopted in the fall, but how the rules were going to be applied and how the companies were going to respond, some of that wasn’t all that well known. I think many of my fraternity of long-time experienced activists were standing back, seeing how this would all work because maybe they’ve already achieved some negotiated settlements. I think we’ve seen a lot of board turnover before the vote season occurred. Were there a lot of hidden campaigns, perhaps? However, since we didn’t see a material jump in the number of publicly announced campaigns, was the increase in campaigns moderated because of settlements that the UPC threat brought about? 

Chris: It could have been organic, but it also could have been this UPC effect?

Andrew: Yes, but now that more people are learning about this and knowing what’s going to happen. I think the number of private attempts is going to accelerate. Some of my best work has never been written about. In other words, the media loves contests. In some ways, a public contest is not a full success. The full success is that our “dispute” never went public. We get many target companies to paint themselves as the good governance team… and let them take credit.

I think one benefit of UPC is — you may lose a few slots, but it’s better not to go to the point of having a contest.

The other benefit of UPC is the fact that at the end of the day, the shareholders are going to be able to select and optimize what they think is the best composition of the boards, and that may not be what ISS and Glass Lewis think is the best composition. By the way, who’s deciding inside of ISS and Glass Lewis? Are they individuals that have ever served on a board?

Chris: Likely not.

Andrew: Right. When I see a proxy, I’m not sure the ISS or Glass Lewis analysis is going to be how I’m going to decide what is best. That is, I have affected change in board composition numerous times, or I’ve nominated many an alternative director nominee, again, mostly behind the scenes, ahead of time, to enhance what might be missing in terms of skills and expertise in a boardroom that I, as a shareholder, want to see added that perhaps the governance/nominating committee of the issuer was too blind to see.

Chris: Andrew, thank you. 

I look forward to continuing our UPC, unilateral advance notice bylaw amendment, and governance bucket list conversation in the August 2023 edition of Planet Governance.

Andrew Shapiro is President of Lawndale Capital Management, an investment advisor of small/micro-cap activist/relational hedge funds for three decades. Mr. Shapiro has also served as Board Member, Officer, Advisor or Observer on many corporate and non-profit boards as well as corporate debt and equity bankruptcy committees. In addition to his public company engagements, Mr Shapiro is presently serving as Board Advisor/Observer to a few early-stage startups and non-profits. His most recent public company board level work was as Chairman of the Official Equity Committee in the Premier Exhibitions/RMS Titanic bankruptcy. 

Chris Clark joined Stuart Levine & Associates as a senior consultant after a distinguished career at the National Association of Corporate Directors. His expertise ranges across a variety of disciplines including corporate governance (with data-driven board assessments and cyber risk diagnostics as cornerstones), strategic communications, conference management, and digital content creation.