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Actually, a current activist campaign illustrates several interesting things about activist situations these days:
- Missing a key universal proxy card (UPC) deadline
- The hassles of advance notice
- The pretense of a BoD Nominating Committee
- The useful "ten-or-fewer" exemption from the proxy solicitation rules.
We see all of these in a slightly quirky proxy contest at Genworth Financial (GNW) from sometime-activist Scott Klarquist of Seven Corners Capital. Klarquist plans to stand for election to the GNW BoD at the 2023 ASM, scheduled for May 2023. He has sent elaborate critiques of GNW exec comp to shareholders, the apparent basis for his campaign.
Props to John Laide at Deal Point Data, our source for developments in company bylaw amendments, for directing us to this one.
UPC Deadline
As we studied the new UPC rule, we explained the new filings and filing deadlines for both companies and activists. In short, an activist notifies the company of its nominees 60 days before the ASM, and the company so notifies the activist 50 days before. Then, we wondered what happens if someone misses these deadlines, as the rule is silent on the consequences. Now we have a concrete example.
Klarquist evidently missed the 60 day filing deadline under the UPC rule. GNW said as much in its proxy statement for the 2023 ASM (p. 97). Now, it looks like a proxy contest under the old rules. Each of Klarquist and GNW will send proxy materials and cards listing only their own nominees. When we raised this question last year, we didn't know if missing the deadline disqualified the activist completely, reverts the contest back to the old rules, or something else.
Advance Notice Hassles
This situation also demonstrates the hassles in complying with advance notice rules. Awhile ago we explained how these work, a few weeks ago we complained about them further, and this situation illustrates them well. GNW has a helpful timeline in the proxy statement (p. 97) and to its credit appears to have worked with Klarquist a little on complying with the rules.
GNW has a filing period of January 19-February 18, 2023 for notice of intent to nominate candidates for the 2023 ASM, set forth in the 2022 proxy statement.
- Klarquist submitted his original notice on February 13, before the deadline
- GNW noted deficiencies in that notice on February 17, and sent Klarquist its director questionnaire and form of representation letter
- Klarquist sent a supplement to the original notice on February 20
- Klarquist sent another supplement on February 24, with a completed questionnaire and form of representation letter.
Klarquist revised his notice twice after the February 18 deadline, so it looks like GNW allowed revisions to the notice, while other companies do not. Klarquist also appears to have duly complied with the advance notice terms, or at least GNW does not mention any action to prevent him from nominating himself.
BoD Nominating Committee as a Waste of Time
The GNW proxy statement has a curious item in its timeline. On March 16, the Nominating Committee considered Klarquist's candidacy:
After a review of the information provided by Mr. Klarquist, the committee unanimously determined not to recommend his name for election to the Board at the 2023 Annual Meeting.
We would not have expected the Nominating Committee to consider Klarquist. Instead, we'd think it would just avoid the subject as much as possible.
The outcome should surprise no one, either. Nominating Committees take seriously a shareholder nominee only when cornered, such as part of a settlement of a proxy contest. We just wonder whether Klarquist requested this, which would constitute the aforementioned waste of time, or the Nominating Committee offered it as a pretense and a sop. At least we would advise activists to refuse to jump through Nominating Committee hoops.
What's Ten-or-Fewer?
In the February 20 notice, Klarquist states:
I currently intend to solicit proxies from 10 or fewer GNW shareholders (i.e., not pursuant to Exchange Act Rule 14a-19).
Now this is interesting. For some reason, Klarquist states he does not plan to comply with some section of the UPC rule by soliciting ten or fewer GNW shareholders. The only part of the UPC rule that has anything to do with the number of shareholders solicited is the 67% threshold. That of course is a minimum, so we don't understand how soliciting ten or fewer shareholders meets that requirement.
Instead, if Klarquist solicits ten or fewer shareholders, he wins exemption from most proxy solicitation rules. We highlighted this tactic a few years ago This includes filing proxy materials on EDGAR and complying with the elaborate disclosures in the proxy rules. Doing this well could allow Klarquist to pursue his election at a low cost and without disclosing his strategy and tactics to GNW.
Whether Klarquist soliciting ten or fewer shareholder will succeed in meeting his goals is doubtful, though. The ten largest shareholders represent about 40% of total outstanding shares. If he succeeds in soliciting proxies from all ten, then he represents a credible threat to the BoD.
However, he can't get the top two shareholders to even return a phone call. BlackRock and Vanguard, who together own 25% of the outstanding shares, have not engaged with him. We encourage him to continue this effort, yet have modest expectations for its success.
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