The Corporate Library Blog

Playground spat at Children's Place?

A humdinger of a proxy contest has been rumbling on at children’s retailer Children’s Place between the current interim management and the former management such that a committee of concerned shareholders led by former CEO Ezra Dabah has nominated three directors to replace the company’s nominees.

Normally, with a classified board, a corporation could laugh off such challenges, but Mr. Dabah, who has been with the company since 1989, has chosen a year when only the class III directors are being re-elected; three directors and a third of the board, including the recently-appointed independent chair Sally Kasaks. On the other hand the incumbent directors include Mr. Dabah himself, Stanley Silverstein – Mr. Dabah’s father-in-law and another member of the committee of concerned shareholders of the company, and another director Dr. Joseph Alutto who, in a curious turn of phrase according to the 2008 proxy statement “was identified for consideration by the committee by Mr. Dabah” despite the fact that Mr. Dabah does not sit on the corporate governance committee responsible for the nomination of directors. If Mr. Dabah’s new nominees are elected, he would then have potential sway over six of the board’s directors, except that Mr. Dabah has since indicated that if his nominees are elected, Mr. Silverstein will resign. Given the 22% of outstanding stock that Mr. Dabah and Mr. Silverstein say they control, this threat is a very real one.

The mud has been slinging freely and, truly, the company has had its fair share of problems, including an inability to identify a full-time CEO to replace current interim Charles Crovitz. But it has also recently settled two lawsuits – one to do with backdating stock options the other to do with misleading financial statements – in both of which Mr. Dabah as incumbent CEO during the period must have been implicated at least in some fashion. Mr. Dabah is certainly implicated in these issues by the current management. He, of course, claims to be innocent of all impropriety, including securities trading abuses and other corporate governance sins that the current management lays at his door and that it says led to his resignation in 2007. The fact remains that the company’s performance has been relatively disastrous over the last three years. That may be because of Mr. Dabah’s actions prior to leaving rather than as a result of current management’s actions. Current management alleges that the actions it has taken have begun to place Children’s Place on a secure financial footing and cite a 17% increase in stock price in the 21 months since Mr. Dabah’s resignation as well as a number of other core financial successes.

But the share price movement has been anything but constant. In the nine months of 2007 prior to Mr. Dabah’s resignation the share price fell disastrously from over $60 to just over $20 per share. But then after a short rally, it declined even further to just over $15, then climbed, then fell again, then climbed, then fell, and underwent a quick, but small recovery in July that has placed it, well, given the volatility, not that far from where it was when Mr. Dabah resigned.

On the other hand, an impressive array of governance reforms have gone into place since his resignation, including:

• separation of chairman and CEO
• an increase in the number of independent directors on the board
• increased responsibilities and power for the CFO
• a new CFO and a new general counsel were hired
• amendments to several committee charters and to the company’s Corporate Governance Guidelines and improvements in internal policies and procedures, including amendments to Code of Business Conduct, Securities Compliance Guidelines and Related Party Transaction Control Procedures
• an amendment to provide for majority voting in an uncontested election of directors

Mr. Dabah’s criticisms of the company’s official nominees are scathing (as are the current management’s criticisms of him) including the accusation that chair Ms. Kasaks oversaw an 84% decline in stock price as CEO of Pacific Sunwear and another 27% decline in stock price while CEO of Ann Taylor. He cites Malcom Elvey’s lack of retail experience and Norman Matthews’ age – he is 76 – as preventing him from preserving the “youthful, contemporary image unique” to the company.

It is virtually impossible to distinguish the right and the wrong in this contest and the financial data, particularly given current economic circumstances, are anything but conclusive. The annual meeting on July 31 looks set to be a stormy one. Let’s hope that the majority of shareholders get to have a say.

Paul Hodgson — Senior Research Associate

Target Board: Pershing Square Capital Plan Lacks Operating Strategy?

Hedge fund Pershing Square, which beneficially owns 3.3% of Target Corporation’s outstanding common stock, has nominated five candidates (William Ackman, Michael Ashner, James Donald, Ronald Gilson and Richard Vague) for election to the Target board at the annual meeting to be held on May 28th. Target’s board is classified, so only seats in Class III are open this year.

Pershing Square’s case for its nominees does not rest on having a specific plan to be implemented at Target, although Pershing Square had been advocating for a transaction allowing Target to realize value from its large real estate holdings. Instead, Pershing Square emphasizes the value brought to the board by its nominees, who have experience in grocery, credit cards, real estate and corporate governance, in light of the specific challenges facing Target.

Pershing Square’s approach appears to have hurt Pershing Square’s nominees with proxy advisor Glass Lewis, which recommended that its clients support the board’s slate due, in part, to the Pershing Square slate’s lack of an operating strategy. (Rival proxy advisor RiskMetrics, on the other hand, issued a recommendation supporting two of Pershing Square’s candidates.) Pershing Square also faults the Target board for low levels of stock ownership and for recent stock price performance lagging behind that of competitor Wal- Mart. Performance measurements cited by Target, however, show it outperforming both Wal-Mart and the S&P 500 over several time horizons.

In addition to the nuts and bolts of running the nation’s second-largest retailer, more abstract notions of shareholder democracy are also at play in this contest. Pershing Square refers to its slate as the “Nominees for Shareholder Choice.” In its proxy materials, Pershing Square states (in the voice of William Ackman, one of the nominees and the founder of Pershing Square), “I have always found it astonishing that in the most democratic nation in the world, elections for the boards of U.S. public companies are generally uncontested. . . . In the political realm, we see analogous elections only in the Third World and in dictatorships. We are not going to solve this problem today, but at Pershing Square’s expense we have created the opportunity for shareholders to choose between the company’s incumbent directors and a new independent slate that we have identified.”

Pershing Square’s request for a “universal ballot” echoes these themes. A universal ballot is a proxy card containing the names of all candidates for the board—those nominated by the incumbent board and those nominated by shareholders. Shareholders can execute one card to vote for whatever combination of candidates they wish, whether all company-backed, all dissident-backed or a combination of the two. (Without a universal ballot, shareholders wishing to vote for some board and some dissident nominees must execute two cards.) Pershing Square requested the universal ballot on the day Target released its definitive proxy statement, which may (depending on which side you believe) have been too late in the game to allow the ballot to be produced and distributed to shareholders, including those voting electronically via Broadridge’s electronic voting platform. In any event, shareholders will be voting in the traditional way, on separate proxy cards, at the upcoming meeting.

In connection with the contest, Target and Pershing Square are also wrangling over the correct size of Target’s board. Target asserted that the board had 12 members, following the resignation of the company’s former chairman and CEO, but Pershing Square claimed that the company’s charter required shareholder approval for any reduction in the size of the board below 13. Although Target disagrees with Pershing Square’s analysis, it has submitted a proposal for shareholder approval setting the board’s size at 12. If this proposal is approved, four board seats will be up for election at the annual meeting. If it is not approved, five seats will be open. (Pershing Square has nominated five candidates in the event five seats can be contested.)

Beth Young — Senior Research Associate, Shareholder Issues, M&A and Takeover Defenses

Carl Icahn and Biogen: The Value of Shareholder-Centered Corporate Governance

Carl Icahn and investment funds he controls have undertaken a proxy contest at Biogen Idec, nominating four candidates for election to the board and asking shareholders to approve two proposals at the company’s annual meeting to be held on June 3rd. If this sounds familiar, there's a good reason:  It's the second contest Icahn has mounted at Biogen Idec in as many years.  He lost a challenge last year where he claimed that a 2007 failed auction had been set up in a way that ensured no buyer would be found.  The ownership of Biogen Idec shares by Icahn and his allies does not appear in the proxy statement because it is not in definitive form, but their most recent 13D filing indicated that they own approximately 5.5% of the company’s outstanding shares.

             Icahn is going to shareholders with two proposals:  (1) a binding proposal to amend the company’s bylaws to fix the size of the board at 13 (to prevent the company from expanding the board upon election of Icahn’s nominees in order to dilute their influence) and (2) a non-binding proposal asking the board to take the steps necessary to cause the company to reincorporate in North Dakota and opt to be subject to the North Dakota Publicly Traded Corporations Act (“NDPTCA”).  This second proposal is interesting because it's a long- term bet on the value of governance that empowers shareholders.  The NDPTCA reads like an activist wish list:  among other things, it imposes a majority vote standard for director elections; prohibits classified boards; requires a shareholder advisory vote on executive compensation; mandates the separation of the chairman and CEO roles; and gives significant shareholders access to the company proxy statement for the purpose of nominating director candidates.

 Icahn lobbied for the NDPTCA when it was enacted in 2007 and he has proposed reincorporation to North Dakota at two other companies in which he has invested:  Amylin Pharmaceuticals, where he has also mounted a director challenge, and American Railcar Industries, where he controls the board.  That he's willing to expand the rights of shareholders even where he has obtained or is seeking to obtain board representation--in other words, where shareholders may use their power to thwart actions taken by directors he has backed--suggests that his commitment to shareholder rights is not simply a tactic to be used against recalcitrant boards.

 Companies can adopt all of the NDPTCA's governance features voluntarily regardless of their state of incorporation.  The advantage of the NDPTCA is that it bundles shareholder-friendly governance reforms--allowing an activist like Icahn to ask for all of them in one fell swoop--and gives them some teeth by precluding the board from undoing the reforms unilaterally.  (The opt-in to the NDPTCA is in the company's charter and thus shareholder approval is required to change it.)  Even if Icahn's proposal passes, Biogen Idec's board is under no obligation to implement it, since it's non-binding.  A strong showing, however, especially one coupled with the election of one or more of Icahn's nominees, would send a strong message to Biogen Idec's board that shareholders believe in the value of more shareholder-centered corporate governance.

For further details on the Biogen Idec proxy contest as well as the proxy contest at Trico Marine Services, please visit our online store to purchase the newly released "Proxy Contest Update: Biogen Idec (BIIB) and Trico Marine Services (TRMA)".

Beth Young — Senior Research Associate, Shareholder Issues, M&A and Takeover Defenses