Proxy Access At Long Last, & Introducing PA Defense # 5: Whitemail

J.W. Verret —  9 August 2010

Reports indicate that the SEC is going to vote on proxy access August 25.  The vote will be 3-2 in favor of proxy access.  The SEC first considered a proxy access rule in 2003 but never voted on it.  Prof. Harvey Goldschmid, now at Columbia Law and then a Commissioner at the SEC, was the central proponent of that rule but was ultimately unable to push it forward.  The SEC considered a different proxy access proposal in 2007 but did not pass it either.  In two weeks, at long last, the dream of the institutional investor community is going to be achieved.  My latest paper, Defending Against Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank, attempts to limit the reach of proxy access.

For the next few weeks I plan to slow blogging about these defenses, I would hate to see the SEC change the rule to side-step one of them particularly given the level of concern from the Council of Institutional Investors (although I’m not convinced the SEC would have the authority under Dodd-Frank to pre-empt the substantive state laws from which these defenses flow.)  For now I’ll share a defense that isn’t likely to be stopped by regulation: Whitemail.

Greenmail was a common practice in the 80s.  Takeover artists would threaten to takeover a company, and would use green proxy cards to solicit votes to facilitate their acquisitions.  At times those takeover specialists would accept payment from the company to give up the fight, and the practice was termed “greenmail” as a variant on blackmail.  The tax code was subsequently amended to impose a high excise tax on greenmail, and in the IRS regs greenmail was defined as payment related to a contest for control.  Since the federal proxy access regime requires shareholder to certify that they have no control intent with the nomination, the greenmail excise tax would not apply in this context.

It should be expected that some shareholders threatening to nominate on the corporate proxy would likewise be willing to contract for a side payment in exchange for giving up the contest.  This is particularly likely for hedge funds, who are more focused on profits than politically motivated public pension funds.  Since proxy nominations go onto the company’s white proxy card, I think a good name for the practice would be “whitemail” to distinguish it from greenmail.