Asset Manager Pioneers Use of Proxy Access at Gas Company

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By Michael Greene

Nov. 16 — Money manager Gamco Investors Inc. has used proxy access to nominate a board member at National Fuel Gas Co. (NFG), in what will be a closely watched first use of the mechanism.

Gamco, which owns a 7.8 percent stake in NFG, announced Nov. 10 that it is nominating Lance Bakrow as a proxy access candidate to the Williamsville, N.Y.-based natural gas company’s nine-member board. The process allows shareholders to nominate their own board candidates on corporate ballots.

Mario Gabelli, Gamco’s founder and chief executive officer, told Bloomberg BNA that the Rye, N.Y.-based asset management firm used the process despite having concerns over whether companies should have proxy access bylaws.

He also said the firm isn’t using NFG as a proxy access test case. “We are doing it on a very friendly basis and only asking for one director,” describing Bakrow as “someone who knows the industry and the company.” Bakrow is a former Goldman Sachs partner who co-founded Greenwich Energy Solutions.

NFG adopted a proxy access bylaw in March that allows shareholders who have held at least 3 percent of the shares for three years or longer to nominate up to 20 percent of the board.

NFG Director of Corporate Communications Karen Merkel told Bloomberg BNA in an e-mail that the company has received the nomination and is reviewing it.

While about 300 companies have adopted proxy access provisions since 2015, shareholder and corporate representatives have said the mechanism is unlikely to be frequently used.

“Proxy access is a right that should be available to long-term investors that have a substantial ownership in a company,” New York City Comptroller Scott Stringer told Bloomberg BNA. “Gamco’s nomination is significant. It helps demonstrate that the mechanism isn’t just a symbolic right.” The push for proxy access at companies was sparked in part by Stringer’s Boardroom Accountability Project, which annually targets a slew of companies with proxy access resolutions.

Activist investors and companies will be keeping an eye on how the Gamco nomination plays out to gauge the effectiveness of the mechanism.

Threshold Too Low?

While proxy access sounds good in theory, the “real problem with it is that the [3 percent] threshold is too low,” Gabelli said. The low eligibility standard may allow shareholders with non-economic agendas to take advantage of the process, he said.

Most of the companies that have adopted proxy access bylaws have provisions similar to the Securities and Exchange Commission’s judicially invalidated federal rule that would have set minimum shareholder eligibility to use proxy access at 3 percent stock ownership. While the federal rule was struck down, the SEC’s current shareholder proposal rule requires companies, under certain circumstances, to include proposals seeking to establish access procedures.

Whether proxy access will be used by more shareholders remains to be seen. “I think it’s still too early to tell,” said Alan Dye, a partner at Hogan Lovells in Washington who advises boards and in-house counsel.

Dye said that too much shouldn’t be read into the nomination at NFG. “Gamco has been trying to influence NFG’s strategy for years, including through the use of shareholder proposals, and the adviser is known for pursuing low-cost activist strategies,” he said.

In 2015, NFG shareholders rejected a Gamco-backed proposal for the company to spin off its utility business.

Larger and shorter-term activists may be more likely to wage a proxy contest rather than waiting three years to become eligible to use proxy access, Dye said. “Proxy access may still turn out to be used most frequently by traditional long-term investors, particularly groups of small investors, who want to address a specific governance issue, not force a change of strategy.”

Stringer similarly said the NFG nomination “doesn’t foreshadow” anything. “I still think proxy access will rarely be used.” There aren’t many investors that can meet the ownership requirements set forth in most corporate proxy access bylaws, he said.

Good Mechanism?

It also remains unclear whether shareholders will view proxy access as an effective mechanism for gaining board seats, and how companies will respond.

Gamco’s use of proxy access at NFG “mostly raises more questions than answers,” said Michael Hermsen, a Chicago-based partner at Mayer Brown LLP’s Corporate and Securities group.

Hermsen said the questions include:

  •  Will NFG argue that Gamco’s notice doesn’t comply with the company’s bylaw provision?
  •  How will NFG reach out to shareholders as part of this process? and
  •  Will NFG make changes to its slate, its disclosures, or any processes or procedures to try to address concerns that it thinks Gamco may have?

 

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

Gamco's filing to the SEC on the director nomination is available at https://www.sec.gov/Archives/edgar/data/70145/000092189516006095/sc14n05867018_11102016.htm.

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