Activist investor Corvex Management has said it wants to seat “A-team” level board members. But finding them is time-consuming. So when a deadline approached this summer to put up a slate of directors at $20bn energy pipeline company, Williams, Corvex founder Keith Meister did not look far to find his 10 nominees. The group he picked, including himself, were all employees of his company. Corvex is a hedge fund so, unsurprisingly, all were men.
Alas, as fond as Mr Meister may be of his colleagues, he was only asking them to serve as “place holders”. In the three months leading up to the November meeting and shareholder vote, he planned to identify suitable energy and management experts. Once his place holder team won the official board election, they would summarily resign and his bona fide picks would take those slots according to his securities filing.
Mr Meister’s straw men are just the latest creative manoeuvre by dissident investors attempting to muscle their agendas on to boards.
Mr Meister had previously joined the Williams board in 2014. While there, he helped engineer a sale of the company to a rival, Energy Transfer, in late 2015. That deal collapsed over a legal technicality in June. Days later, six board members including him resigned after the group failed to oust the Williams chief executive.
Williams, at that point, opened up an unusual 10-day window for shareholders to put up nominations for the board. Typically there is a 30-day window that starts four months before the scheduled annual meeting but when this year’s AGM was delayed, the time period changed. When investors objected to the short notice, the company relented and pushed the nomination deadline out a month to late August.
At that point, Corvex offered a non-binding proposal about improved professionalism at Williams, rather than putting up its own candidates. But when the company opposed the proposal and rebuffed a bid from another suitor, Enterprise Products, Mr Meister was offended enough to put forward his own slate. He then had little choice other than to resort to his place holder nominees. The legality of his gambit, however, will not be litigated. Williams last week announced it would add new board members to another three newcomers it appointed in August. Corvex was satisfied enough to stand down.
A legal fight would have been conducted in Delaware where Williams was incorporated and corporate charter and bylaws provisions are scrutinised. There is no statute requiring companies to have bylaws that require board nominees to be provided well in advance of the AGM. But nearly all companies have implemented them as courts have held that management has the right to impose “order” on these proceedings (imagine the spectacle of board nominees being unveiled at a board meeting to be voted upon in real time).
Still, companies’ desire for order has been balanced against shareholders’ rights not to be “disenfranchised”. In this age of activism, companies and investors are falling out more often, as bylaws have required ever more detailed information about board nominees including on their shareholdings and compensation arrangements.
“A challenge to a particular bylaw would likely centre on whether it could be applied equitably or otherwise unduly restricts shareholder rights,” said Sarkis Jebejian, an attorney at Kirkland & Ellis. Back in 2012, Carl Icahn missed a nomination deadline at Amylin Pharmaceuticals. But he sued, arguing that the company had changed the stakes by disclosing after the deadline that the board had rejected a bid. A judge ruled that the knowledge of the rejection was relevant information for shareholders. He said he was inclined to allow Mr Icahn’s nominees to be considered, though the activist later dropped the suit.
Observers have speculated, in the wake of Corvex’s gambit, that companies may adjust their bylaws to force directors to pledge to serve full terms. Undoubtedly, that kind of new requirement will eventually end up court.
Companies though should not reflexively fear D-listers crashing the boardroom. Shareholders would still need to elect them over incumbents. If such a motley crew prevailed in an election, management should instead wonder why shareholders would be so upset with the status quo that they opted to take that risk.