UPDATE: Trian, Disney, and

Universal Proxy

Trian updated its proxy statement late last week, mostly to identify the "Opposed Company Nominee". Recall its first draft did not name the DIS director that Nelson Peltz will to run against. We mused this tactic would make directors nervous and paranoid, especially if Trian dragged it out a little.

Trian waited only a couple of weeks to name Michael Froman, currently an executive at MasterCard. He's mostly a civil servant who served at high levels of the Clinton and Obama administrations. He worked largely on international finance and was US Trade Representative in the second Obama term. He joined Citigroup during the Bush years, and MasterCard after Obama.

Trian explains its opposition succinctly:

...Mr. Froman has no experience as a public company director outside of Disney, and, moreover, has served as a member of the Governance and Nominating Committee of the Board, which the Trian Group believes has overseen weak corporate governance at the Company.

This move suggests the Trian proxy contest will aim squarely DIS corp gov. This allows easy comparisons between the sparse BoD experience of Froman and considerable BoD resume of Peltz. Trian also avoids protracted debates about the merits of past decisions, such as how much DIS should have paid for Fox. They shift attention away from industry experience of Peltz and also Froman, since both have relatively little, which is of dubious value anyway.

Trian continues to affirm the continuous voting logic of UPC. As we indicated below:

Trian decided it wants a single nominee, Nelson Peltz. It understands for that one nominee, UPC logic and strategy implies it target a single DIS incumbent, the weakest among them. Trian then urges shareholders to concentrate their voting power on electing Peltz and opposing only that targeted incumbent.

We have also suggested the BoD slate should support the activist thesis for the company:

An activist should make clear to other shareholders the advantages of its specific nominees compared to each incumbent, and urge votes following these distinctions. Even better, an activist will need to connect its nominees directly to its thesis for the company, and demonstrate how individual candidates will carry out its plans.

Looks like Trian wants to make this about corp gov at DIS. If so, they picked the right director to oppose.

This new proxy contest immediately jumped to the top of the list of most significant, interesting, and substantial ones in 2023.

Oh, right - for those who somehow missed it last week, Trian Partners told DIS its CEO Nelson Peltz plans to stand for election for the BoD at the 2023 ASM. It notified the company privately on 12/1/22, filed a preliminary proxy statement last week, and launched a nifty website hosting its proxy materials, letters to the company, SEC filings, and other goodies.

There's much to think about here, for DIS, activist investing, corp gov, and other relevant subjects. For now, we don't have a view about who is right and who might prevail. Here, we observe what the contest in its early stage tells us about the new universal proxy card (UPC) system. We also comment about the overall proxy contest.

Trian Embraces the Logic and Strategy of UPC

First of all, Trian claimed the blue proxy card, even though DIS bylaws don't appear to restrict this. So, there's that.

Speaking of bylaws, DIS appears to have not amended them to update for UPC, unlike hundreds of other companies in the past few months.

More important, Trian has embraced the continuous voting logic of and strategy implied by UPC. Its preliminary proxy statement notes:

Due in part, to the nature of the SEC’s newly-adopted universal proxy rules and the manner in which votes will be tabulated, to help ensure the election of Nelson Peltz, we recommend that shareholders vote “FOR” Nelson Peltz and “WITHHOLD” on the Opposed Company Nominee.

Trian decided it wants a single nominee, Nelson Peltz. It understands for that one nominee, UPC logic and strategy implies it target a single DIS incumbent, the weakest among them. Trian then urges shareholders to concentrate their voting power on electing Peltz and opposing only that targeted incumbent. Key components of the preliminary proxy statement hammer home that point.

Trian does not (yet) disclose which DIS incumbent it wants to oppose. It leaves that part of the preliminary proxy statement conspicuously blank, referring instead to the single "Opposed Company Nominee" and to the other ten (out of eleven incumbents) as "Acceptable Company Nominees." This should make for some fascinating, tense BoD meetings in the coming months, as DIS directors wonder which one of them Trian thinks is the weakest.

Trian wants to collect proxy cards, rather than relying on DIS. It encourages shareholders to vote for both Peltz and acceptable(!) DIS directors on its blue card. Earlier we noted how this allows Trian to track voters.

The "Acceptable Company Nominees" concept also helps get through a potential voting mechanics problem under UPC, namely overvoting. With all nominees on a single proxy card, shareholders can easily vote for more nominees than there are available BoD seats. For DIS, the proxy card will list twelve nominees (for now, if no additional nominees from other shareholders make it through) - eleven incumbents and Peltz. In other proxy contests under UPC, the parties indicated if a shareholder votes for more nominees than there are available seats, the proxy card won't count. In this one, if a shareholder overvotes, then Trian will vote for Peltz and the ten acceptable ones. Very deft.

Trian actually submits two nominees, Nelson Peltz and his son Matthew Peltz, also at Trian, as an alternate. The SEC allows this. This likely helps with notices to the company, or if DIS expands the BoD. If for some reason Nelson can't stand for election or Trian decides to seek more than one seat, it already notified DIS about Matt.

It's worth noting that Trian has experience with UPC. It sought to use a UPC at its DuPont proxy contest in 2015. It was also one of the few activist hedge funds that wrote to and lobbied the SEC in the UPC rule making.

What a Proxy Contest!

We have a few comments about this situation, beyond UPC.

This is new territory for DIS, not for Trian. DIS has seen its share of activist investors and controversial corp gov, including one documented in a favorite book on corp gov. It just settled a potential proxy contest with Third Point and Dan Loeb in September 2022, adding a director that Third Point helped recruit. However, this is the first contested solicitation proxy statement ever filed at the company. It hasn't even seen a Form 13D filing in at least 25 years.

Trian has done this before. We profiled Trian's approach a few years ago. It notes in its presentation to the DIS BoD it has run three other proxy contests, and succeeded sooner or later in all of them.

DIS shareholder engagement, as it were, was pretty bad. For now, we have only Trian's account as set forth in the preliminary proxy statement. At least based on that, DIS bungled some chances to avoid this:

• After some initial discussions with Trian earlier in 2022, starting in November 2022 DIS prohibited all BoD and executive contact with Peltz and his team except through the General Counsel and CFO
• Peltz repeatedly asks to talk to the BoD, and the GC is "confused", evidently about why a significant shareholder and one of the most prominent and successful activist investors would want to spend time with its elected representatives
• The BoD declines to add Peltz to the BoD in November, and in January instead offers him a role as a non-voting BoD observer pursuant to a strict standstill agreement, which Peltz (and most other significant activists) has never done, couldn't use, would never accept, and might have seen as a joke or insult or both.

If DIS leadership wondered how well or poorly this might go, Peltz suggested one way. Trian disclosed DIS CEO Bob Iger couldn't schedule a requested BoD meeting over the holidays "due to Mr. Iger’s plans to sail his yacht off the coast of New Zealand."

Finally, Trian discloses it expects to spend $25 million and its proxy solicitor, Okapi Partners, will hire 200 people for this project. This would become one of the most costly proxy contests in history, ever since Trian spent $25 million to win a BoD seat at PG.