IN-DEPTH: Special rights

Companies are increasingly giving shareholders the right to call special meetings, in light of continuous pressure from shareholder proponents and the broader shareholder base to strike down their defenses. But in some cases the strategy of appeasement may encourage shareholders to come back for more concessions.

In the first half of this year, 19 Russell 3000 companies added special meeting rights, already equaling the previous record set in 2018, according to Activist Insight Governance, which tracks the data back to 2013. Ten of these companies are part of the S&P 500 Index, including oil major Exxon Mobil and healthcare companies HCA Healthcare and Cigna.

Gadfly pressure

Ning Chiu, counsel in Davis Polk’s capital markets group, told Activist Insight Online this is the result of “more shareholder proposals, especially at larger companies that already eliminated multiple other defenses” and also rising support from institutional investors.

Meanwhile, some companies are being proactive about governance improvements in the hopes of winning brownie points from shareholders. “Institutional investors…tend to view this kind of corporate governance change as a badge of ‘good governance’ even if no actor has exerted any kind of pressure,” Emiliano Catan, a professor of law at New York University, told Activist Insight Online.

Indeed, Lawson Products, a $300-million market-cap industrial products distributor, adopted the special meeting right this year because it is “consistent with good corporate governance practices” and “increases director accountability.” Lawson has not received any formal shareholder proposals in recent years, although Catan reckons firms might “react to less formal pressure.”

Activist Insight Governance data show that 67% of S&P 500 companies have special meeting rights, and 49.5% of the Russell 3000.

Written consent

Another reason why companies are adopting special meeting rights is because it’s a more palatable alternative for boards than shareholders acting by written consent, a right increasingly being called for by shareholder proponents such as Kenneth Steiner and John Chevveden. Boards have a greater degree of control over the special meeting process. Some companies also say in their proxy statements that institutional shareholder support for the special meeting right is much higher than for written consent.

Year to date, 61 companies have received such resolutions versus 37 and 41 in full years 2019 and 2018, respectively. But average shareholder support for these proposals has gradually declined from 45.5% in 2017 to 35.8% in 2020.

High threshold

Despite corporate America’s increasing willingness to allow special meetings, the stock ownership thresholds needed to hold them are typically very high and, in many cases, come with additional requirements. Around 18% of Russell 3000 companies have the threshold set at 50% or more. In the S&P 500, nearly a quarter of all firms have the threshold set at 25%, requiring the support of several billion dollars worth of equity in many cases. To requisition a special meeting at Cigna, for instance, shareholders owning $17 billion worth of stock would have to band together, which in practice might be very hard to do.

In addition, the typical right requires shareholders to have owned the stock for at least a year. Corporations say they institute the high thresholds because they do not want to face regular attacks from minority shareholders whose interests might differ from the broader shareholder base.

The U.K., Australia, and some Continental European and Asian countries have 10% or 5% thresholds for calling general meetings, and see a lot of activism conducted via this way. In the U.S., around 11.7% of S&P 500 companies have 10% thresholds, and less than 1% have a threshold of 5%.

As such, most activists in the U.S. prefer to seek board changes at annual meetings, although recently there has been an increase in the number of special meetings and consent solicitations. Just last month, Senator Investment Group threatened to call a special meeting at CoreLogic if the company does not engage over a takeover bid it submitted along with private equity firm Cannae Holdings. CoreLogic has a threshold for calling special meetings of 10%, while Senator owns 15%.

Pushing lower

And in a sign that appeasement efforts might actually encourage demands for more concessions, shareholders have recently started to push for amendments to the special meeting right, including lower thresholds, typically for 10%. According to data from Proxy Insight, 127 proposals to amend the special meeting right were advanced since 2018, versus 56 in the three years between 2015 and 2018.

Exxon Mobil, which this year adopted a 15% threshold special meeting right, and Cigna both faced such proposals this year. Each proposal was voted down by shareholders, but in the case of Cigna only by a very slim margin (45% of shares present supported the resolution).

Chiu believes that the threshold should be decided by corporations “after thoughtful consideration of their individual circumstances and review of their vulnerabilities and defenses overall.”