|
Yes, Vote No? Maybe...
Let's say upfront: voting "no" or withholding votes on directors is a relatively weak way to influence a portfolio company. We're stubborn, so we prefer electing directors or amending bylaws. Binding acts work much better than non-binding, like opposing exec comp in an advisory say-on-pay vote or supporting even a well-conceived precatory proposal.
That said, around this time of the year, sometimes an investor might consider a "vote no" campaign. Here we explain some of the conditions where it might make some sense, and the questions and mechanics involved.
By "vote no" we mean an activist advocating other shareholders oppose one or more incumbent directors at a portfolio company, without nominating any competing directors. Proxy advisors so advocate frequently, many times after a BoD ignores a favorable (to an activist) vote on a precatory proposal. Activists do so much less often.
Direct and exempt
Activist have two ways to advocate for a no vote:
- Direct solicitation: an activist solicits proxies from shareholders using its own proxy materials. It votes solicited proxies to oppose one or more incumbent directors, without nominating any competing directors.
-
Exempt solicitation: an activist urges shareholders to oppose one or more incumbent directors and vote accordingly on the company proxy card. The activist makes its case to shareholders publicly, relying on a standard exemption from SEC proxy solicitation rules.
Direct solicitation incurs the expense of proxy statement drafting and filing and of a proxy solicitor. It also wrests a little control over AGM vote counting, as we saw with the similar 14(a)-4 proposal solicitations (more below). Exempt solicitation incurs only the expense of drafting and filing the proper SEC form and maybe a news release.
Recent cases, usually futile
We saw a few proxy solicitation examples in the past few years.
-
ETFS Capital solicited proxies to oppose three directors at WT in 2024, reducing those directors' votes to 85% support, compared to nearly 100% for the other directors.
-
Blackwells (yes, them) solicited proxies to oppose all nine directors at AHT in 2024, with two (including the CEO and BoD Chair) receiving less than a majority, triggering mandatory resignation, which the BoD then refused.
-
Legion Partners solicited proxies to oppose two directors at GES in 2022, who then received materially less support from shareholders while still winning a majority of votes; the next year one of the two did retire from the BoD.
We also know of at least a couple of exempt solicitations, including BT Brands at NROM in 2024 and Land and Buildings at QTS in 2018. In both cases, shareholders reduced support for the directors as the activist advocated, but those directors still won a majority of votes and remained on the BoD.
Outside of direct solicitation, plenty of shareholders oppose directors each year, typically following the advice of proxy advisors. This tactic usually fails, leading to dozens of "zombie directors" at numerous companies.
Why even do this?
Given the inherent weakness in the approach and the subsequent failure to dislodge the incumbents in recent examples? Maybe you missed the deadline to file notice for director nominations, either because you decided to escalate too late or you just plain didn't get around to putting it together. Perhaps the company rejected such a notice and you don't want to litigate their decision. Up that point, after devoting resources to pressuring the company, you might want to continue your efforts rather than waiting a year or more.
A "vote no" campaign does assess shareholder sentiment. Even if an activist fails to defeat one or more incumbent, it sets them up for future pressure. Maybe significant-but-not-decisive opposition can lead to a successful actual proxy contest the next year. At least it puts the BoD on notice that shareholders want change, although any astute BoD should know that already.
While unlikely, a "vote no" campaign at a company with a majority vote standard for director elections has succeeded in booting one or another director. Have modest expectations, as more companies are like AHT than KIRK.
Maybe you want to put just a little pressure on a company. You don't want to truly challenge a BoD with competing director candidates, but merely want to send a mild signal. A "vote no" campaign would accomplish this. Again, we're stubborn so we don't understand why an activist would think about a company this way, but you might.
Finally, it seems simple and easy to consider including some form of "vote no" on a proxy solicitation for a shareholder proposal. These solicitations, under Section 14(a)-4 of the SEC rules, can pressure companies in new and clever ways, including gaining some control over the voting process. If a shareholder goes to the trouble of assembling a proxy solicitation for a solid precatory proposal or bylaw amendment, then why not include opposition to especially problematic directors?
The mechanics of a "vote no" campaign are not trivial. Of course, you need to prepare proxy materials (for a proxy solicitation campaign, not for an exempt one). While not as involved as ones with competing director nominees, you still include the rest of the information for a standard proxy statement and proxy card.
Also, a shareholder cannot literally check "no" on a ballot or proxy card. Most of the time, they indicate "against" or "withhold" for the director they oppose, instead of "for" or "support". By all means, the shareholder should not "abstain", which merely becomes not voting at all, rather than voting against the director or directors. Sometimes "withhold" actually means "abstain", so an activist must check the bylaws and past proxy statements to establish how the director vote operates. Earlier we explained in more detail these mechanics.
We might have missed one or another activist "vote no" campaign from the past few years, successful or not, so please let us know.
| 
