Transcript
Welcome to shelter. Primacy from freefloat media, podcast about activist investing Security's law, and all the ways. The financial and legal worlds, intersect and Collide and real life. Anna and I are back and of course his law professor University of Colorado who teaches and research a Securities and business loss, she holds up the legal end of this podcast Enterprise Michael Van and activist investor who lives and works in Chicago. He covers the financial side of our podcast. Yes, I do. Go ahead. I will be the person, who once again, advertisers that we have an email address shareholder Primacy at freefloat LLC. So, if you have questions or something, you'd like us to talk about to us and send us an email shareholder. Yes. Perfect. All right. So today we're going to talk about and you're going to help me with the phrase. The constitutive constitutive constitutive documents in the context of a really interesting or bizarre situation. Having to do with Duke Energy is of course the bias and some Corporation and amendments there of and we will start with This curious situation, as I said, involving a Duke Energy and it has to do with majority voting. In when shareholders, vote on stuff. So a really interesting to happen this year at Duke and we kind of highlighted. So it really kind of illustrates, you know, the frustrations that activists like me kind of encounter in some of the most routine stuff. and and importantly what companies kind of do or say they do or look like they're doing and don't really do to support or really to try to oppose share. So and I I know you saw this a little bit, but let's if I may, I'm going to kind of go over a little bit of the kind of fact facts on the ground. So what caught, what caught our eye was that early this year at their AGM? Duke Energy, you know, huge utility Recommended shareholders vote in favour. Of a preparatory proposal. Which doesn't usually happen. And the precatory proposal was from all people, John Chavez in our favorite most prolific, ESG, really, G governs proposer. It's not. There's also job. There's just so yeah. Yeah, yes exactly. But John's up there and it was his proposal was a very general one and it's one. He's submitted in many, many places and also at Duke Energy before, as we'll see, and it was a very general one. That said we just urged the company to adopt a majority vote standard Anytime shareholders vote on stuff. All right. So hey go. What was the standard? What what is the standard it do? If you don't, if you don't have it, they have an owner. I would just describe it as an owner, supermajority requirement in place today. So that's for yes, it's in the charter and and that's where I want to. I'm going to need to pick your legal brain shortly. It's in order to amend. For shareholders to amend the charter and the bylaws. Duke Energy requires 80% of the outstanding, not present at the meeting, 80% of the outstanding shares to vote in support of the matter. Okay, that's for by law. Amendments is that for Charter amendments as well? Or is it? Yes, that's Charter amendment by Amendment so I yeah, right. And so the the bylaw Amendment Provision, I think references back to the Charter Amendment provision. So it requires an amendment to the Charter, which is, we'll see in a minute. There's a little difference about how that works. I think so. So that's what Chevette and recommended this year or moved this year submitted predatory proposed as predatory proposal just, you know, totally optional. You know, this is the sense. This is kind of what shareholders, kind of feel and do Duke said this is a great idea. So they put it on the agenda and it got like 96 or 90 7% support in part because Duke said it's a great idea so you gonna post it you know John like did Duke board like that so cool. However, there's been a history here. Okay, there have been no fewer than seven such proposals at Duke since 2016. It is like it is like their recidivist it's it's the you know, the oldest continuing shareholders. Yes precatory proposal well it kind of goes back and forth so here's the here's a little bit of the history which is what I just thought was like so weird. Okay, John first proposed it in 2016. As a predatory proposal, essentially the same thing, he put up this year saying, we think that anytime there's a supermajority it should be go to majority and at the time it got like 53%, it got majority support from the shareholders at the meeting. Okay? So, do then very dutifully the next year. put up a the specific amendment that was being proposed. Yes. So if you go in the center of outstanding, right? If you go in the 2017 proxy statement, there's the text of an amendment to that. I think that Charter. saying we're going to amend the charter and it's going to go down to the majority and so on and so forth that received 59% support from all the outstanding shares. So not enough to make the Smashing success, way more than a but not enough to amend it, okay? For whatever reason, the very next year, 2018, Duke came back again with the exact same Amendment unprompted. In 2018, and then put it on the proxy again or in the AGM agenda. And they got 62% a little little higher but still Not enough, not correct. Then they took a couple years off, they got tired of all this and in 2020 John submitted his predatory proposal again. This time. I think the company basically said, we are not taking a position on it. And for whatever reason, probably the proxy advisors came out and strong support. It won 94% support. on this practitioner, both smashing the Preparatory one had it been Binding. Yes. Well, maybe even it wouldn't Hurt. 94% of the shares present at the meeting. Now, that's standing shares, but it might have, but if you reflect back. Yeah. Okay. So the next year company, put it back on the on the AGM. This is where it's just kept coming back like a bad penny. A 2021 certificate, tried to amend this year for Corporation. Again, they got 63%. So 1% more than they got, you know, three years before and if it didn't bend, right? So then took it off. John comes back there, if he's nothing if not determined. That's just it just seems and I think we're gonna get like that having it be predatory. Makes no sense. No sense in this content, right? And this is this is what this is. One of the observations that I want to ask you about in a little while. Okay, is that in 2023? John submitted one, another Preparatory. Proposal just two years ago? Well I mean I can see why John is doing it as a Purgatory. Well, it's complicated, but do recommending in favor of the predatory and said, just putting it on the agenda. Doesn't make any sense, right? Yeah, yes, right. That's what I that's why I want to try to interrogate a little while so just to finish the timeline. So in 2023, two years ago there was another prokaryotes support from the voters. Great, you know the next year do put it back on the agenda. for men this certificate guys, 64%, again short of the 80% Okay, so what is this? Tell us, this tells us that, you know, there's people want it but for some reason not enough or something. So I mean it's just a question of retail shareholders, don't participate in the vote, kind of a situation. Well, but there may be reasons. Why are there's the ways we can change this or something? And that's about anyway, so so this this year, John did this one more time? The company. This time supported it. and, You know, one that is so I'm expecting in 2026, they're going to go through this whole stupid showing. Once again, it was a private proposal this year, massive support of the voting shares, right? The highest it's received, you know, the highest before this is 2020, when 94% this year at 190 97 or something, but it wasn't binding and right. I guess we don't know whether it would have won passed if it was by, but it might have. And now we expect, it'll go up for a binding vote again, right? So what one thing that's worth noting, is that what when we're talking about this sort of majority shareholder support, its it has to do with A couple of things I could think a couple of things that it majority shareholders support to approve bylaw amendments, which I want to talk about a little later. And membership for Incorporation. There's you could also talk about this in the context of like, special shareholder meetings right now. There's a supermajority requirement there. I think For shareholders to call a special meeting. Yeah. That's that's not surprising. Yeah, no. Yeah, absolutely not. Um, so in this case, there's a few other companies that You know, that do this, you know, have these owners. And there's a lot that have sort of supermajority requirements, there's not all that many of this like, 80% threshold. That's cute. Right 80% of outstanding rather than of president, at the meeting, is there anything else that you can sort of think of where the majority? Shareholders stuff would would be sort of I thought special shareholder meetings and kind of buy one man's? Well, I mean, Charter Amendment special? Yeah. Reincorporation to a new state. Sure. Right. But importantly, these are removing a board staggering sure. Yeah. Okay, great. So these have to do with when shareholders want to do this. Okay. You know, in the board wants to amend the bylaws. It's just a majority of the board, the board just can do that, right? And then same thing with special shareholder meetings. The board can just call immediately. Exactly. So this is all. When children are specifically yeah what want to do that stuff? Okay, great and importantly, this is doesn't do with bortle, you know, director elections. There's a whole different set of Standards, right? It's plurality those, you know, there's companies that have majority vote standards like in ish, exactly, you know, uncontested elections where if you don't get a majority of triggers, this whole Arcane and usually kind of remember resigns and they don't accept the resignation whatever, right? It's a whole feudal process. Usually, which we saw it Netflix, in particularly this year where, you know, that long standing directors Didn't win, majority tendered his resignation, the company says no, he's too valuable so you can stand. So that was emblematic of how how flawed this whole majority at least in Board elections. All right, so let's let's go back to what sort of happened to do. Okay. And this this is where I'm Kind of curious. And we'll talk about the difference between amending bylaws and many certificates of Incorporation. I think the main difference, well, I need you to kind of help me here. Is that is that certificates are kind of shareholder driven? No, no. It's the only way. Okay, a certificate can only be amended if it is of the amendment is first proposed by the board and then there's a shareholder vote. Like there's a very specific order. Its shareholders can urge the board to put it as a resolution but the board has to put it forth first and then the shareholders vote and the reason. So when I said, I understand why Kevin is doing this predatory thing, at least if he's looking to amend the charter, he can't propose to amend the charter. He the only thing the way it has to happen is that the board proposes it, so he can make it to worry board. Please propose it but he can't really do much more than that. But okay what's weird is the board saying I recommend in favor and set of just proposing it in which case the Cher's would vote. But instead the board recommends a favor at the Presbyterian proposal and then gives it another year before. They actually formally put it on. The ballot, seems very much like, it seems kind of performative. Okay, well, I want, yeah, I want to talk about that in a minute about the kind of effort. That Duke is how seriously Duke maybe taking this, but And this is something I've talked. And thought about is that, is that Shareholders can propose specific bylaws but they can propose bylaw minutes. So there's a byline place. That's says you can't amend without 80% of shareholder. Vote. That may be true but the shareholders can still propose to amend that. I don't know, maybe they need 80% to get it. Now the directors usually they could just repeal it all by themselves, they don't need the shower, right? So vote because directors can revealed. So once again, that Duke is recommending in favor of a Purgatory proposal to amend the bylaw and said just amending the bylaw. Okay, so that could have made a binding proposal to amend the bylaws. Yes. But that evidently in the context of Duke and a handful of the companies wouldn't work because the charter also can't quite the 80%. Yeah you know but it's still make it a binding. Oh I see. So like the charter requires by law amendments to be at 80%. Yes, the charter says buyer holder driven. Yes, that's that, that I know. Okay so yes so then so then Uh, it's not the bylaws that are presenting the 80% that are presenting the 80% Channel. At both cases, it's the charter, that's presenting the right. So that's why John has to be. Do these predatory that's to do this one in a predatory way? Because he can't amend the bylaws because, because again, because because that would conflict Charter and he can't amend the charter. Initially because that requires the board to make the first proposal but it's weird. Then that the board is recommending in favor instead of just putting it on the ballot to them in the charter. Okay. That and that's right. I want to talk about is that is that it seems to me That Duke. Even though they recommended in favor. Yeah, of John's precatory proposal, which again, they have it, they haven't done before in terms of his consider, it's weird that the board would say, yes, vote in favor of bored. Please. Consider like, we can just don't know, right? Yes, exactly. Put it on the ballot in the shareholders can tell us, right? But they don't really even need shareholder. I mean, can't they just shareholders and say no like informally. What do you think? And they could have a meeting and say we've talked to we I are called 50 of the top shareholders, our sense. Is that this is something that shareholders would like. So we're just gonna prove it. Well, I mean they have to put it on the exactly. For a predatory vote and then put it on the ballot, the very next year, right? And, and, and the thing that they Would have to put on the ballot, is the amendment to the actual Charter. Yeah, the actual Charter. And okay. So so going through all these additional steps Feels like they're kind of slow stuck in it as much as possible. And we know, I mean, we it's not. I mean, I don't know how hard it is to get it at 80% that. I mean, we have certainly seen and I think this is where you're going and I'm sorry for Creative like, no, go ahead. He's one to have shareholders vote and they're having trouble with turnout. They have mechanisms for increasing turnout, you solicitor, you put up your website, you promise, a tour of the Tesla factor, I mean, whatever it is like you do that, right? So it's it doesn't seem And again I have an I don't attend the meetings, I'm not a Duke shareholder, I haven't really looked really closely, I but it doesn't and I did look a little bit when I was thinking about this. It does not seem that Duke is making any any extra effort. Related to this, then they haven't any other, right? So, the issue here is, right? They just there, they are not. They understand, they're very slow walking when they actually put it on the ballot and they're not making any effort to get the turnout, they need to get to get it packed, right? It's just really, really endorse it right? And that and that doesn't affect. Duke leadership adversely. Because if there's some sort of bylaw amendment that they want, like to conform the bylaws to the universal proxy stuff, we saw a ton of that, you know, two, three years ago, or other types of bylaw amendments to change the advanced notice Provisions or whatever. They just do it only right? Yeah I mean because well. Yeah. Power to amend the bylaws. But if the charter says that shareholder driven by laws, can only be at 80% shareholder approval. And that's not something that they can do by that. Would have to be right or not, but there's, there's nothing that I can tell and I can I'm not a student of reading Charters that way you are. Thank There's nothing in the charter. That is so. Important today to the board. And that's not our Charter's work. They like you, they pertain to like the classes of stock you have and so forth. Well, in Delaware. Delaware, Tracy, Delaware Charters, do not and they're Delaware Corporation. Yeah. Um, in Delaware, boards, do not have the bylaw Power by default. It has to be given to them in the charter. Oh, sure. But they happen to have it here. Unlike the shareholders. They do not have restrictions on what they can, right? Yes. So so the idea that they're not Pushing hard to do this particular Charter Amendment doesn't hurt him know, and it makes them look like other than the obvious impression that one gets after looking at this year after year that they're recommending in favor, but with their fingers crossed. But yeah, but you and I and John, and only a few, others only want to pick this up, picked up, so and anyway, I have a couple more questions for you about this. Again, I'm, I have a little legal advice here and I did nothing here. We do is legal advice to anybody, but why don't we, why don't we talk about that in a minute? After we take a quick break here at shelter Primacy. The Primacy is brought to you by free flow and analytics.com. Only free database of corporate directors their influence and their performance. If you own a stock are retirement, plan go to freeflow analytics.com and look up which of your elected directors are performing well and which aren't use your vote in the alternative democracy and get your data at free flow. Analytics.com. Now, back to the show, And lifting here with Mike Levin, we're talking about bylaws and Charter amendments. Um, I had a couple more questions for you that this whole meditation about Duke kind of inspired or at least some interesting ideas. And so we've, we've kind of, you know, figured out that Duke is Not a behaving too seriously about this or not, not wanting it to happen, as much as maybe some others do and that we've kind of, you know, looked at the difference between bylaws and Charters. And so forth, which is kind of interesting and useful to activists as we're trying to think about how to get change at companies. What your sense about sort of the difference is between, and I have a perspective here, but I want curious what you think about difference is between the precatory proposal process and actual like binding bylaw, amendments. What if you there are two reasons that you would make a real distinction. So first of all, there are certain kinds of things that simply can't be bylaws like a lot of the ESG stuff that people propose like a report on the diversity. Or, you know, we want you to report on diversity efforts report on. Auntie, diversity efforts, like, whatever that. Like all those kinds of like the shareholders can't control the board's management of the company very often to avoid Tripping into controlling management of the company. It's predatory because the view that has, you know, up till now is the shareholders are not using board power. If all they're doing is saying pretty pleased, we would like it if you did the thing. So, okay, very often predatory proposals are because it would literally violate state law. Usually Delaware law to make it a by law. But there's one other reason that I've seen things that you absolutely could do. Like procedure things like this came up a lot with Proxy access, which shareholders were Company, by company to seek proxy access? Yes. Sometimes they proposed it at bylaw, amendments. And sometimes they proposed it predatory, and the reason that I, the impression I have is for why they went with the predatory ones was because if you want to give shoulders proxy access, there are administrative stuff, that's part of that. Like and then they have to submit by such and such date and it has all right, 20 or 20 or more shareholders and whatever. Right. Yeah standard. It's like there's going to be procedural aspects with when it has to go on the ballot and what do you anyway. And I got the impression that sometimes Cheryl there's wanted made it predatory asking directors to adopt it because they did not necessarily feel competent to draft the administrative aspects, okay? And they didn't necessarily want like the board to say we oppose it because don't you know you have to submit by this date so they could in the drafting they could kind of make an error that makes the whole thing moot. So I think that is why sometimes they didn't know always, but I think that's why sometimes for proxy access they made it precatory so well, there's these one. Yeah. So so those are the reasons why you choose pregnancy. I've been I've been an advocate Of bylaw amendments. You know, this whole predatory proposal Enterprise strikes me as You know, forgetting, you know, whether or not the matter is, is something I agree with or not agree with just, you know, just urging a board to do something when they could easily ignore it or the cost of ignoring it is gonna not be born for two or three years. When finally, someone gets around to You know, voting against you is a direct you because you ignored my predatory proposal two years ago. Seems to me to be. Not taking advantage, you know, again. But here's the thing you got to find stuff that you can amend in the bilas and you make a great point. But there, I mean we're seeing it now like it's Slush shareholders. Are repeal. The bylaw that says you can only bring a derivative sure if you have three percent they can do that and they're trying and we've seen separation of chair and CEOs good. Yes. Right? So there's there are things that are susceptible and they're more obviously, for reasons you just outlined. They're more in the G part of the ESG proposal world. Yes. All right, ens stuff. You can't the reason you can't put in the bylaws is because it compels the board to do stuff that just you can't that's what they don't. That Cheryl does not have the authority to command board to do. All right. It's then I have another another Two, two ways I want to go with this. So let's suppose the whole world says, oh Mike, you're right. We're gonna look for biological amendments. That's really smart. That's really wait. A really good way to start imposing our wishes, our will on a company and so forth. What's different companies from going in just changing? The bylaws the next day? Well, it depends on the state of incorporation is, everything always does? So, yes. So actually Bank of America shareholders pass to buy a loss, separating chair. She CEO a couple years later Bank of America directors just got rid of it. So wasn't the next day, but it was soon enough after and it was the showers made such a stink about it, that Bank of America, finally agreed to have a shareholder vote on the repeal, but they didn't have to, and it was only because, and then it passed by the way. Okay, shoulders voted. But yeah, so in Delaware, There is not again, directors, only have the bylaw power, if it's given to them in the charter, presumably you could put in the charter directors, can't repeal a shareholder enacted by law, but no one ever does. So as far as we know, directors power to repeal shareholder, enacted. Bylaws are relatively unconstrained except for one little piece of Delaware law. That says, if shareholders pass a numerical threshold, for director voting, like, it has to be 50% and shareholders pass to that in a bylaw. Directors can't unilaterally repeal it, but other than that, there's nothing in Delaware law that stops directors who are given full bylaw power in the charter from appealing, shareholder by Los. Yeah, the NBC. The model business Corporation act it by default says and now you know, I don't have any states, have adopted it, exactly as drafted, but the model business Corporation act says that shareholders. Have the power to put in the bylaw directors. Can't touch this and then it's binding if they put that in the bylaw. Oh, so that's in the model that's in the model. I have no idea. I don't know. If states have adopted, it is written. I'm sure somebody has but what I don't know because it's just not in Delaware code and I don't know if cases. I mean, it doesn't mean they don't exist. Means I just don't know whether shareholders could pass a by law and Delaware for a company that otherwise has a charter provision that gives directors unconstrained bottle of power. I don't know if shareholders could put a bylaw that says, oh, by the way, directors can't repeal that. And whether that would be binding. I mean, I just as far as I know, it hasn't been tested and as we otherwise directors. Yeah, they can repeal it other than this one. That the statute says, if you put there and there's a little at least a little bit of a history of that happening and probably just happened more. We just know that one example that I like to use it because I could just see directors saying, oh, Mayonnaise shareholders, they don't know what they're doing next week or, you know, or they. And that's another reason to do these predatory. I mean, if you know, the directors can just repeal it anyway, you may as I mean, and then it's either way, it's the same message, it's directors, we want this and they'll listen to it or they want. I still, I'm stubborn man. And I just, I want to do stuff where the, with the boards, you know, can't. Yeah. I think it sends a stronger message, if you if there's an actual dialogue, when you can. And as I said and hell, you know, Cheryl could try and also right into it directors, can't repeal this. See if it works, right? So that leaves me to my last little mechanism that I be kind of carry about, is that To what extent has been tried? Or does it make sense or whatever? For two to provide, for shareholders to ratify. Directors boards by lawmen. Yes, that's exactly what happened in Bank of America. And it also was one of the things that was tried with proxy access. So, um, so some of the proxy access. I mean, there were a couple different kinds that went around. But when shareholders are seeking proxy access at least one version was, we request the board passed the proxy access bylaw. And we request they get shareholder ratification right? And in the Bank of America situation after directors, repealed the bylaw that separated Sharon CEO. They then asked for Cheryl to ratification, because the shareholders were making such a stink about them doing it unilaterally. So, but that was a repeal as far as the actual passage. I my sense with the precatory proxy access situation was once again, given that as far as We Know, Nothing Stops aboard from appealing, a shareholder and acted by lot in Delaware. I think I guess is that what the shareholders were hoping was that if the board passed it and got shareholder approval later, then that would put it in the strongest legal position? Should the directors ever decide to, you know, laterally, repeal it? Because we just don't know? so because, you know, the because here's the thing, is that my sense is that the reason boards, Are allowed to amend bylaws is for routine stuff or for can, you know, to conform to some sort of new rag or what ever? But that the general idea would be anything significant. Should. I guess be subject to shareholder approval ways put that in the charter and, you know, directors are the ones who draft that initial Charter when it goes public. And you know, like even though like as I said, Delaware does not give bored a bylaw power. Initially it has to be in the charter. Presumably you could limit it. However, you want it model. This is Corporation act. Just by contrast. Directors, have the power to pass by laws by default in the charter, but you can change it in the charter. I mean, you know, so it's really if you want table directors only have bylaw power. That is essentially technical in nature or responding to new legal developments. You can do that. Okay. Oh, that's interesting because that's something that I I thought about. You know, noodle through. Hmm. How about some sort of a Bi-Lo on myth that requires? shareholder ratification of board initiated by law Amendment and then and then we get to a very meta situation where then the board repeals that if you put that in the The charter that exactly has five laws. But at the next like let's say it's an emergency situation the board. So then you would say the board compounds bylaws. But at the next shareholder meeting, they have to get it ratified or it goes away something like that. Yeah. All right, cool. All right well this is interesting. So we'll have to we'll have to look at this again, next spring. Well, seriously with Duke if they put any more effort into it's a respecting and implementing the shareholders. Obviously exuberant sentiment in support of this removal of the majority vote requirement, but this is good. All right, cool. Let's let's wrap that up here and we can we can figure out more subjects to talk about sometimes soon. So we will return to this later, once Duke has that vote. So this is your holder Primacy hosted by and Lipton to me Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is Professor of Law and Lawrence, WWE, chair of Business Law at the University of Colorado law school. You can find me Mike. At the activist investor.com, you can find an at law.com colorado.edu, our podcast is produced and distributed by free float media. Thanks for listening. We'll talk again soon.