by Cydney Posner
In “Seeking a Cure for Raging Corporate Activism,” published on March 17, 2015, in the WSJ, the author discusses a technique resurrected from the 1980s that some believe could, on reexamination, be “a bulwark against short-termers who roam the markets, looking to force buybacks or an untimely company sale.” Known as “tenure voting,” the concept would give investors additional votes if they hold their shares for at least a specified period of time, thus rewarding long-term holders by giving them more say in the future of the company than, say, short-term hedge fund activists that may favor short-term profits over long-term business strategies. Will companies begin to pursue this strategy?
The concept of different voting rights is certainly not unique. Preferred stock often carries different voting rights, and many companies that have gone public in the last decade or so allocate disparate voting rights between two classes of common stock, with 10 votes per share attributed to the class of common typically held by founders and management. Tenure voting is positioned in the article as a middle course. According to a law professor cited in the article, with tenure voting “[y]ou still have an opportunity for shareholders to deal with a management that needs to go, but it isn’t going to be decided by a simple majority vote….It gives you more protection…..”
The concept was reportedly invented during the 1980s in response to a wave of hostile takeover attempts. Perhaps the first company to implement this approach was J.M. Smucker Co., which adopted a tenure voting plan as a stockholder protection measure (and still has some version of it). Under the plan, existing stockholders received ten votes for each share held. However, upon transfer, these shares would revert to one vote per share, but would regain super-voting status if they were held for 48 consecutive months. In 1996, in Williams v. Geier, the Delaware Supreme Court upheld adoption by the board of a similar plan as a proper exercise of the business judgment rule to promote long-term planning (even though the effect of the plan was to concentrate voting rights in hands of a controlling bloc); the plan was then approved by a fully informed stockholder vote, which was considered dispositive.
Commentators observed that tenure voting is hardly a panacea: it may scare off some regular investors and may not even be effective to thwart all raiders and activists. In the event of a hedge fund activist campaign, as one professor commented, the “short-term votes have to convince the long-term votes to agree.” But that could certainly happen. See these news briefs for a discussion of the recent trend toward institutional shareholders throwing in their lot with activist investors. As a result, management can no longer assume that institutions will be on management’s side in fights against hedge fund activists. Other commentators noted that keeping track of the duration of ownership of stock, especially beneficial ownership, could be complicated, if not impossible. Moreover, tenure voting would likely be difficult for a public company to adopt, with the result that the voting structure would most likely have to be adopted prior to or in connection with an IPO. And, needless to say, proxy advisory firms ISS and Glass Lewis may look askance at this type of uneven voting structure, even though, in contrast to some other approaches, nothing prevents any stockholder from obtaining super-voting rights.