An influential business lobby group may soon press the nation’s securities regulator to speed up the “proxy plumbing” process that occurs in advance of a vote on a major deal, a prospect that has sparked outrage among activist hedge fund managers who argue that the same change will hurt their ability to mobilize support for their dissident campaigns and director candidates.
At issue is the amount of time the Securities and Exchange Commission gives corporations to establish who their shareholders are in advance of an annual meeting or a special meeting, such as when investors vote on a merger or acquisition. Specifically, the agency requires that corporations begin their inquiry with various banks and brokers to determine how many beneficial owners they have 20 business days — four weeks — prior to a “record date” that the company sets in advance of the meeting. Investors who purchase stock prior to this scheduled record date are entitled to vote those shares at the upcoming scheduled annual or special meeting and those who buy shares after that day are not. (The inquiry is made so that companies can determine how many proxy statements to provide to its shareholder base).
Brian Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington, said that an American Bar Association committee he chairs is debating whether the time has come for the SEC to shorten the mandatory search period. Breheny, a former chief of the SEC’s M&A unit, argued that recent technological advancements have made it easier to collect a list of shareholders, adding that a shorter period would speed up the process of preparing for a vote on a deal or other transaction and allow it to be completed with fewer headaches.
The subcommittee may soon vote to submit a petition asking that the SEC shorten the inquiry period to five days, significantly less than the current four-week investigation period, according to people familiar with the situation. The SEC is not required to follow up on the petition, but the ABA is a major and influential pro-corporate SEC constituent (made up of numerous ex-SEC officials) and agency staffers typically pay close attention to the group’s suggestions.
Backers of a compressed inquiry period insist that it would be helpful in situations where shareholders are voting on transactions, because it would provide more deal certainty and less time for external issues to arise that can lower valuations or dismantle deals — such as third-party bids, poor earnings reports, employee departures or macro-economic problems.
“In a merger transaction speed is important because the parties want to consummate their deal as quickly as possible to avoid any unforeseen, intervening circumstances,” said Sanjay Shirodkar, an attorney at DLA Piper in Washington. “Factors such as the global economic situation … can change between the time a deal is announced and when it closes. People want deal certainty. Shortening this period would serve to increase deal certainty.”
However, activists involved in proxy campaigns to seat dissident directors argue that, depending on when they launch their contests, a shorter broker-banker inquiry period could significantly reduce the amount of time available for other activists or institutional investors sympathetic to their campaign to invest in the stock before the record date hits (thereby removing many passive or pro-management shareholders). Investors who buy securities after the record date aren’t permitted to vote their shares at the meeting and those that sold stock immediately prior to the record date typically have little incentive to vote shares they no longer own. They also raise concerns about the shorter period, arguing that the extra time could be useful if it gives third-party rival corporations a chance to issue their own more shareholder-friendly offer.
“With a shorter inquiry period, a company could try to speed up the record date and the annual meeting to help ensure that pro-activist shareholders don’t rotate into the stock in any size,” said a general counsel at a major dissident investor who launches multiple campaigns a year.
Regulatory observers point out that, in the current 20-business-day system, a corporation’s inquiry to banks and brokers is supposed to be private but word often reaches the activist about when the record date will take place before it is publicly disclosed.
Activists and corporations involved in a proxy contest can only officially solicit votes in favor of their director candidates after the record date passes. As a result, activists are also eager to find out when the record date is set for because they want to be the first one to solicit the investor base to get their votes. Alternatively, the corporation would like to delay that information as much as possible, so they can have a first-strike advantage.
“Activists would have less time to campaign and convince existing investors to back their dissidents,” the general counsel added.
Activist fund manager Phil Goldstein of Bulldog Investors LLC, which has $570 million in assets, said he would prefer that the SEC required corporations to publicly disclose the record date and meeting date when they make their inquiry to identify their investors. That information, he added, would help Bulldog immediately solicit investors to support his dissident candidates after the record date passes. “They [corporations] should publicly disclose the record date and meeting date when they are sending out their search cards,” Goldstein said. “There are times when we don’t know when the record date is until after it passes.”
A managing director at a major proxy solicitor agreed that a shorter inquiry period would be distinctly pro-corporate, adding that corporations faced with proxy contests typically want to have the record date come sooner rather than later so that less stock turns over in advance of the meeting. New investors to the security after a proxy contest is launched typically back the dissident, he added.
People familiar with the SEC’s views say agency officials acknowledge technology has made it easier to establish shareholder lists but are taking dissident investors’ concerns into account as well.
In some cases institutional investors want to vote their securities at an annual meeting or a special meeting called to approve a deal but they have a huge bulk of their shares loaned out. According to an activist manager, these investors prefer the longer 20-business-day period because it gives them enough time to call back loaned shares in time to vote their stake. In other cases, hedge fund managers who have derivatives positions in a target company want sufficient time to acquire stock in the company, as part of an effort to protect their swaps stake, he added.
Nevertheless, corporate lawyers argue that activist concerns are spurious, arguing that insurgent investors can announce that they will nominate dissident directors months in advance of an annual meeting, giving sympathetic investors sufficient time to buy shares before the record date hits, regardless of whether it is expedited or not.
This would not be the first time the SEC changed its inquiry time-period. The SEC first set up a 10-calendar day inquiry period in 1977 but, after hearing from an advisory committee that recommended a longer inquiry period the agency in 1983 changed it to 20-calendar days. In 1986, the commission again extended the required time, this time to 20-business days before the record date. This change was designed to address reported delays and compliance issues. However, corporate lawyers insist that in addition to speeding up deals, a shorter inquiry period would have another benefit: to help expedite plain vanilla annual meetings.
Shirodkar noted that a rapid inquiry process would simplify and speed up the proxy system and reduce complications around SEC reporting deadlines and board schedules. In some cases, he points out, three or four months pass between when an inquiry is made and when a routine annual meeting and vote takes place. “A lot of things can happen in that time,” he said. “Compressing the inquiry timeframe would help the company get to its annual meeting faster.”