April 17 marked the official start of a proxy contest between Ashford Hospitality Trust (AHT) and UNITE HERE. In contrast with most contests, shareholders will not be choosing between rival candidates vying for seats on the board. Instead, dissident UNITE HERE is distributing, and drumming up shareholder support for, its own proxy cards displaying a roster of seven shareholder proposals.
The union fund’s gold dissident card for the May 12 meeting features all management proposals and seven shareholder proposals, which ask the company to take the following actions:
Company Proposes Minimum Ownership Bylaw
Require shareholder approval of any amendment to the section of the bylaws currently providing the right of shareholders to initiate bylaw amendments
Restore the threshold required to call a special meeting from 35 percent to 25 percent of outstanding shares
Require shareholder approval of any amendment to the section of the bylaws currently establishing a non-classified board
Adopt a new bylaw establishing a shareholder approval requirement for any poison pill
Ensure that neither the CEO nor the board chair hold a disproportionate ownership interest in the common shares of the company’s advisor (currently Ashford Inc.) relative to his or her interest in AHT
Revise its advisory agreement with Ashford Inc. to remove penalties to termination or otherwise becoming self-managed; to amend the base fee to provide that AHT pay the lowest, rather than the highest, of its three alternative base fees; and
Allow open bidding for all hotel management contracts at its hotels.
To make this situation even more unusual, proposal five on the company's proxy card asks shareholders to amend the bylaws to establish a minimum ownership requirement of 1 percent of outstanding shares for one year to nominate a director or propose other business. Unlike minimum ownership requirements for proxy access, the AHT bylaw amendment would apply even to director nominations put forward through a traditional proxy contest, in which nominating shareholders bear the costs and responsibilities for distributing their own versions of the proxy statement and card. Additionally, the AHT amendment would not allow shareholders to satisfy the ownership requirement through an aggregation of multiple shareholders.
The proposed bylaw amendment also bars shareholders with less than 1 percent stakes from proposing “other business.” Based on Ashford’s current market capitalization, this would represent about a $10 million position. Although the bylaw amendment does not expressly apply to stockholder proposals introduced under the SEC’s Rule 14a-8, it is worth noting that a $10 million stake is 5,000 times the SEC’s current minimum of $2,000 and five times the minimum suggested last year
by then-Chancellor of the Delaware Court of Chancery Leo Strine.
Of AHT’s 220 institutional shareholders, no more than 20 have owned at least 1 percent for at least one year, according to JJ Fueser, research coordinator at UNITE HERE. The union fund holds 765 AHT shares, which at present are worth about $7,300. The fund would need to acquire more than 893,000 shares in order to reach a 1 percent threshold.
Fueser said that the fund’s shareholder activism at AHT is straightforward. “UNITE HERE has a general concern with AHT being externally managed by a related party at a time when shareholder rights are declining.” In the company’s written defense of the bylaw proposal, the situation is characterized very differently, as “an attempt by the stockholder to assert its influence in a labor dispute at one of the company’s hotels.”
Bylaw Applicable to Submission of Shareholder Proposals?
UNITE HERE believes the bylaw amendment, even if adopted, would be unenforceable if used to try to disqualify shareholder proposals submitted under Rule 14a-8.
"The proposal demonstrates the tension between so-called 'private ordering' and the federal securities laws," explains Michael Barry of Grant & Eisenhofer. "To the extent the company would try to apply this limitation on shareholder proposals introduced under Rule 14a-8, I think they'd have a real problem," he predicts.
Attorney Con Hitchcock echoed his skepticism about the applicability of the bylaw to submission of shareholder proposals. "I find it hard to believe that the limitation on one's ability to offer a shareholder proposal would be legal, since that limitation so clearly conflicts with SEC rules," he says.
"Theoretically, a company could construct a bylaw that permits the exclusion of all precatory proposals," says Keir Gumbs of Covington& Burling. "The company could then pursue no-action relief against future proposals as an improper subject for shareholder action under Rule 14a-8(i)(1) or a violation of state law if implemented under Rule14a-8 (i)(2)," he adds. Gumbs does not, however, anticipate AHT's bylaw proposal will become a mainstream strategy for other REITs or companies for three primary reasons: potential shareholder pushback, validity challenges in court and a potential negative reception from proxy advisers.
AHT is incorporated in Maryland, which provides that companies' charters or bylaws may require shareholders to provide advance notice of director nominations or shareholder proposals, but does not specify whether limitations may be placed on shareholders' ability to propose a nominee or any other matter for consideration.
The proposal opens questions as to whether Delaware, where most large publicly traded companies are incorporated, would validate such a bylaw. With respect to director nominations, Delaware law expert Larry Hamermesh suggested in an article last year that although "stockholders' statutory right to nominate directors cannot be eliminated altogether," a modest ownership requirement is likely to be viewed by a court as promoting orderly and effective shareholder voting. On the other hand, Hamermesh expressed greater skepticism about the validity of minimum holding periods to nominate.
AHT says it will not implement the bylaw unless its shareholders approve it. Institutional investors will play an important part in the outcome. AHT's most significant holder is Vanguard Group, with 13 percent of outstanding shares. Last year Vanguard voted in favor of all seven board nominees and against the shareholder proposal for majority voting. Six-percent-holder BlackRock withheld support from two incumbent directors and opposed the majority voting proposal. Three-percent-holder AllianceBernstein withheld support from all but one director and supported the majority voting proposal.
AHT's proposed bylaw amendment comes one year after unusually high withhold activity at last year's election of directors, when six of the seven board nominees received less than 70 percent support among votes cast for and withhold. Two directors--including lead director Dr. Benjamin Ansell-received less than 60 percent support. No candidate failed to garner majority backing. Last year, shareholders adopted a non-binding proposal to adopt majority voting for uncontested director elections, and the board adopted shareholders' recommendation in October 2014 (subject to shareholder ratification of a charter amendment at the May meeting.)
Reductions in AHT Shareholder Rights
In February 2014, AHT's board, without seeking shareholder approval, eliminated shareholders' right to submit a binding bylaw proposal. The right was later restored in October. Also in February, the board raised the threshold to call a special meeting from 25 percent to 50 percent of outstanding shares. The threshold was subsequently lowered to 35 percent in October.
All of these governance changes took place in the midst of a February 2014 spin-off of the company's asset management advisory business as Ashford Inc. The new entity would have a classified board and no shareholder right to call a special meeting.
After the announcement of the Ashford Inc. spin-off but before its completion, UNITE HERE solicited shareholders to call a special meeting at which they would have voted on several UNITE HERE proposals including a recommendation that the Ashford Inc. spin-off be submitted for shareholder approval, and restoration of Ashford Inc.'s annual director elections as well as shareholders' right to remove directors and to call a special meeting. Though unable to obtain the requisite support from 50 percent of outstanding shares, UNITE HERE obtained the backing of a majority of shares represented, and subsequently decided to submit several of the proposals it intended to put forward at the special meeting for the 2015 annual meeting.
AHT challenged UNITE HERE's submissions for the 2015 annual meeting as materially false and misleading in federal district court in Texas. AHT also sued the union in Maryland, seeking to enjoin the solicitation of proxy materials with the UNITE HERE proposals. While the Texas litigation remains pending, the proxy contest officially kicked-off when the union requested a stay from the Maryland court and AHT declined to oppose it.
AHT is only one of several lodging REITs facing shareholder activism from UNITE HERE. The union has put forward a total of 27 governance-related proposals at 13 lodging REITs as part of an effort that started in 2012.