ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 2)
We are discussing a bylaw submitted for shareholder approval at Ashford Hospitality Prime, Inc. that would restrict shareholder proposals to shareholders owning 1% of the outstanding shares for at least a year. The proxy statement with the proposed bylaw is here.
The company viewed the restriction as necessary given that some proposals could be "expensive and disruptive to the company's normal business operations." The company mentioned that "some stockholders in the past may have abused the Stockholder Proposal process by submitting Stockholder Proposals with the intent of interfering with the board's management of the business and affairs of the company." Imposing the requirements would " help ensure against frivolous, self-interested proposals which tend to abuse the corporate governance process."
The company's concern, however, appeared to be the activities of a single union. As the proxy statement asserted:
- a large labor union has targeted the company, Ashford Trust and Ashford Inc. with stockholder proposals, and at Ashford Trust, a solicitation of written requests for a special meeting of Ashford Trust's stockholders, in what our board and the boards of Ashford Trust and Ashford Inc. believe is an attempt by this stockholder to assert its influence in a labor dispute at one of Ashford Trust's hotels. Our board believes that the proposals submitted by this union have motivations other than the best interests of the company's stockholders in mind. Our board believes the union's true motive is to further its own personal interests, at considerable expense to the company, and to the detriment of its stockholders.
The company indicated a belief that the union engaged in a practice with other companies of using proposals not to "enhance corporate governance practices" but to "gain leverage in labor negotiations."
- The union has a long history of using a nominal holding in company stock in what we believe is an effort to manipulate corporate governance for its bargaining advantage in other matters and so as to have a basis to provoke governance fights with corporate boards and management. Over the past decade, this union has submitted at least 32 stockholder proposals (not counting the proposals sent to the company, Ashford Trust and Ashford Inc.) to companies in the financial, hospitality, gaming and food sectors, the very sectors in which the union attempts to organize workers. We believe that this union holds negligible shares in various public companies, not for investment purposes, but for the sole purpose of being able to make stockholder proposals, which require significant management attention and corporate resources and cause management to focus on matters other than the operation of the business. Historically, this union has acquired shares in, and submitted stockholder proposals with respect to, public companies in which it holds a negligible economic interest but in which union activity by such public companies would have a significant economic impact on the union and its members. Based on these past actions, we believe that this union views the Stockholder Proposal process as a means to further its own goals and gain leverage in labor negotiations, rather than to enhance corporate governance practices.
The proxy statement included a number of examples of the union submitting unsuccessful proposals to the company.
- On several prior occasions, the union has tried this same tactic with Ashford Trust. The union has attempted to pass proposals twice that, if passed, would affect Ashford Trust's corporate governance. For each of these proposals, Ashford Trust has had to expend resources and efforts on correcting misstatements by the union and ensuring that its stockholders were fully informed of the ramifications of the union's proposals. For example, in May of 2009, the union attempted to separate the roles of the Ashford Trust's Chairman and Chief Executive Officer, which Ashford Trust's board had determined was in the best interests of its company to combine the roles. This proposal was voted down by Ashford Trust's stockholders. Undeterred, four years later, in May of 2013, the union again sought to separate the roles of Ashford Trust's Chairman and Chief Executive Officer positions. Ashford Trust's stockholders voted this proposal down, too. That same year, Ashford Trust requested permission from the SEC to omit two of the union's other proposals from its 2013 proxy materials. In both instances, the SEC determined that it would not recommend enforcement action if Ashford Trust omitted the proposals. It seems clear that these sorts of proposals are not submitted with a view towards protecting or maximizing return on the union's nominal investment in any of Ashford Trust, Ashford Inc. or our company, or that of other stockholders, but rather to further the union's goals in labor negotiations.
The "substantial costs" associated with the proposals included the expending of "significant resources on protracted litigation".
- This year alone, the union has submitted nine separate proposals to the company, Ashford Trust and Ashford Inc. This abuse, instead of advancing the collective interests of the company's stockholders, needlessly wastes company resources. Our company, Ashford Trust and Ashford Inc. have incurred substantial costs in defending against these frivolous proposals. In addition, our board, management team and other employees have spent countless hours of their valuable time dealing with these proposals that could have otherwise been spent advancing the interests of the company and all of its stockholders. For example, Ashford Trust is currently expending significant resources on protracted litigation in Maryland state court to defend against seven improper proposals the union is attempting to raise at Ashford Trust's 2015 annual meeting of stockholders. These proposals were not brought properly or timely under Ashford Trust's bylaws and many of them simply attempt to usurp the responsibilities of Ashford Trust's management team and board of directors' obligations to manage the business and affairs of the company. We believe it is clear from these proposals that the true intent of the union is to harass Ashford Trust in an effort to achieve leverage in an unrelated labor dispute. It is this sort of abuse and waste of company resources that we wish to eliminate by approval of the Proposed Bylaw Amendment.
The interaction with the union apparently convinced the company that no small shareholder should be allowed to submit proposals. See Proxy Statement ("The board believes that a stockholder without a meaningful stake in the company should not be entitled to submit Stockholder Proposals, particularly, as we have seen historically, when those proposals are submitted to advance the interests of such stockholders, interests which may not be shared by the majority of stockholders of the company. The board strongly believes that stockholders who have a meaningful and long-term interest in the company are the stockholders that submit proposals more likely to be in the best interest of the company and its stockholders. Accordingly, those are the stockholders that should be entitled to submit Stockholder Proposals.").
For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws).