Gamco Investors Proxy Access Campaign Turned Out To Be A Flop

A couple of weeks ago I wrote about how Gamco Investors had become the first activist, nay, the first shareholder to file a proxy access nomination.

On Monday that campaign turned out to be a flop. Faced with a vigorous defense, Gamco’s nominee withdrew his name from contention and in a two-line summary of its position filed via a Schedule 13D, Gamco said it “will not pursue proxy access.”

Gamco Investors

The episode was revealing, despite its brevity, for several reasons. Activists are not expected to use proxy access in great numbers, but the approach of National Fuel Gas suggests issuers have no intention of allowing them to do so freely. In a letter to her counterpart at Gamco, the company’s general counsel noted in no uncertain terms that the proxy access bylaw the activist intended to take advantage of was not intended for use by filers of Schedule 13D:

“Based on Gamco’s past conduct and current actions, the Board has determined that (1) Gamco possessed an intent to change or influence control* of the Company when acquiring some if not all of the Proxy Access Request Required Shares; and (2) Gamco continues to have the intent to change or influence control of the Company. As a result, Gamco’s Notice does not comply with the proxy access provision of the Company’s By-Laws, and the Company will not include Gamco’s proposal in the Company’s proxy materials.”

The decision to push back in this way is revealing. It indicates that even with stock ownership requirements designed to exclude the average mutual or hedge fund from using proxy access, issuers will attempt to exclude those types of investors on other grounds. As Bernard Sharfman, an academic who has been skeptical of the utility of proxy access from its earliest days, told me this week, “Boards, knowing they cannot prevent proxy access in this current corporate governance environment, would prefer not to deal with hedge fund activists in any circumstance, so they are happy to have them excluded.”

Sharfman himself sees proxy access purely as a mechanism to increase the power of shareholders, and rarely if ever the value of stocks: “If you are in the shareholder empowerment movement, having proxy access is a great negotiating tool to have,” he says. “For example, if you are looking to increase employee benefits or wages it is great. Or, if you are looking to present yourself as a populist political leader fighting the evil corporate interests on topics of climate change, sustainability, etc., it is also great. Whether or not a hedge fund activist can participate in proxy access with the prospect of enhancing shareholder value is not relevant.”

Dave Whissel, director of corporate governance at proxy solicitor MacKenzie Partners, sees it differently. Large and influential owners of stocks can likely persuade boards to consider their director picks without a public campaign, so instances of proxy access are likely to be rare, he suggests. However, after a corporate scandal or crisis, there could be a scenario where “the stars align,” and smaller investors might want to suggest a director, he adds.

Whether an issuer responds so aggressively the next time a proxy access nomination falls and how the law interprets the requirement to file a Schedule 13D may determine whether the tool is of any use whatsoever.

*The definition of changing or influencing control is taken from the language setting out where a Schedule 13D is required and largely relates in this instance to Gamco’s campaign for National Fuel Gas to spin off certain assets in this instance. This suggests a history of filing environmental and social precatory proposals is unlikely to be disqualifying, but does raise the question of whether a below-5% shareholder with an intention to influence control from the day they bought shares would be disqualified.