Activist shareholders have become a major burden to some corporations by causing the company to spend as much as hundreds of thousands of dollars just to prepare for numerous ballots on diverse proposals.
The process also takes time away from busy attorneys, finance specialists, accountants and others in a corporation who must review the proposals and prepare the votes. Granted, some of their proposals have made sense and have helped to improve the company’s bottom line, but other ideas simply clog up everyone’s schedule.
In response, Leo Strine, the new chief justice of Delaware, has proposed the idea that activist shareholders – every time they come up with a proposal – must fork over a filing fee of anywhere from $2,000 to $5,000 if the proposal relates to economic issues, so that they “bear some of the costs they impose.”
Writing in the Columbia Law Review, Strine suggests too that these investors “disclose more information about their own incentives so that the electorate can evaluate their motives, and provide incentives that better align the interests of money managers and ordinary investors toward sustainable, sound long-term corporate growth.”
He also would like to restrict proposals to a shareholder or shareholders whose investment totaled at least $2 million – as opposed to the current limit of $2,000. In addition, he wants to see complete, up-to-date information about the economic interests of stockholders so voters know who and perhaps why investors are proposing changes.
“If stockholder input is to be useful and intelligent, it needs to be thoughtfully considered,” Strine added in the academic essay. “Not only that, it simply raises the cost of capital to require corporations to spend money to address annually an unmanageable number of ballot measures that the electorate cannot responsibly consider and most investors do not consider worthy of consideration.” In fact, he says most investors do not want corporate managers “distracted” by addressing shareholder votes unless they relate to such issues as mergers, which “are economically meaningful to the corporation’s bottom line.”
Strine’s comments are particularly of interest because his home state of Delaware is home to about half of all U.S. public companies.
Without such a move, he warns activist investors could “turn the corporate governance process into a constant ‘Model United Nations’ where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes.”
Last year, Veta Richardson, president and CEO of the Association of Corporate Counsel, was quoted by Inside Counsel that shareholders now have a more influential role and are more proactive in seeking change where they believe there is room for improvement.
One other option to activist investors submitting their numerous proposals is for all parties to use something like the Shareholder-Director Exchange, which offers businesses, their boards and investors self-help methods to avoid heated discussions on issues. Some members of the exchange are board members of Coca-Cola, Hertz and Home Depot; representatives from BlackRock and Vanguard; and attorneys from Cadwalader, Wickersham & Taft.