Corporate Governance

Yucaipa American Alliance Fund II, LP v. Riggio: The Growing Use of Poison Pills to Preclude a Proxy Contest (The Role of the Investment Advisory Firm)

By J Robert Brown Jr.

One of the conclusions made by the Chancery Court in Yucaipa was that the proxy contest would turn upon the recommendation of RiskMetrics, the largest investment advisory firm.  As the court noted:

• Yucaipa admits that if it gets the support of Risk Metrics, it will likely win, . . .  The policies of Risk Metrics about contests for a minority of the board help Yucaipa, as they make short slates easier to elect. Risk Metrics also makes plain that it looks at nominees' strategic plans and business expertise. For these reasons, it is plain that Yucaipa can win and is indeed perhaps a favorite in a proxy fight for three members of Barnes & Noble's board. Certainly, Yucaipa is not precluded by the Rights Plan from running a successful campaign — rather, its merits case will be the key. In that light, it is also noteworthy that all of the experts in this case agreed that Risk Metrics was much more likely to support an insurgent slate than the management slate.

Irrespective of what the parties thought, the conclusion that the views of RiskMetrics was outcome determinative was far less certain than the opinion suggests.  For one thing, RiskMetrics disagreed with the conclusion.  For another, the evidence was apparently non-case specific generalizations about RiskMetric's influence. 

• the reputable proxy solicitors who testified in this case both agree that Risk Metrics exercises a great deal of influence over the vote of many of its clients and that these clients often hold an important part of the available vote in contests. Although one should not overestimate their influence, nor can anyone in politics ignore the reality that if someone controls a key swing bloc of, say 5% to 10% of the vote, one has real influence. In this case, the record is such that both Yucaipa and the defendants agree that the two most important factors in the outcome of any proxy contest between Yucaipa and Barnes & Noble's management slate will be the vote of Aletheia and the recommendation of Risk Metrics.

The opinion included some citations for the proposition.  The citations, however, were vague statements about the ability of advisory firms to sometimes influence an election. 

• The power of a small voting bloc is greatly enhanced by a favorable set of recommendations from Risk Metrics, which is 'able to sway up to 30 percent of the vote in any particular proxy contest.' Stephen J. Choi, et al., Director Elections and the Role of Proxy Advisors, 82 S. CAL. L. REV. 649, 657 (2009) (noting that a number of developments, including recent calls for greater shareholder activism, 'increase the potential importance of the shareholder franchise and thereby increase the potential effect of the proxy advisory firms that influence the manner in which shareholders vote'); Edelman & Thomas, supra note 156, at 36 ('Voting recommendations by ISS are viewed as influential, if not determinative, in proxy contests. . . . Institutional investors overwhelmingly use the services of ISS and the other third party voting advisors, and empirical research as shown that ISS's recommendations have an impact on the outcome in shareholder voting contests.').

The views, therefore, reflect no real analysis of the particular facts of the case.  Moreover, they reflect the general views expressed by the Vice Chancellor on the role played by such advisors.

That RiskMetrics influences some shareholders doesn't provide much insight into this case.  This case has an unusual ownership configuration that suggests any set of general rules may not apply.  Thus, the Riggios have a block of about 40% of the shares (assuming all director and employee shares are included).  While Yucaipo only has about 20%, it will have about twice that amount if Aletheia, the other large shareholder, aligns with Yucaipa (informally of course since any formal agreement would trigger the poison pill). 

Thus, the impact of the RiskMetrics recommendation needs to be examined in the context of a proxy contest where only 20% of the shares arguably remain unaffiliated.  In this context, the nature of the remaining shareholders matters.  Empirical evidence shows that not all shareholders follow the RiskMetrics lead.  While mutual funds may more often follow the recommendations, the same cannot be said for other shareholders. See James Cotter, Alan Palmiter, & Randall Thomas, ISS RECOMMENDATIONS AND MUTUAL FUND VOTING ON PROXY, 55 Vil. L. Rev. 1, 55 (2010)  ("Voting data from the last five proxy seasons show that mutual funds voted consistently with ISS recommendations on both management-submitted and shareholder-submitted proposals. By comparison, the data show that all shareholders voted in the same direction as management recommendations, on both non-routine management and shareholder proposals, more often than with ISS recommendations."). 

Thus, while mutual funds are more likely to agree with a RiskMetrics recommendation, most other shareholders are likely to favor management.  The impact of a RiskMetrics recommendation is, therefore, no where near as clear as the court suggests, at least without an analysis of the categories of the remaining shareholders.  As a result, while its true that the pill does not preclude Yucaipa from trying to influence the recommendation issued by the proxy advisory firms, it is far from clear just how important this will be to the outcome of the contest. 

Primary materials are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 14, 2010 (boomark / email).