Struggle to be heard

The moment he saw the dissident proxy card, Robert Schifellite knew he had a problem. Internet and telephone voting for proxy contests had been around for a year and a half, but this was the first time the senior vice president and general manager of ADP ICS had been presented with a short-slate contest since the introduction of electronic voting. Of particular concern was that the dissident card featured only its own nominees. While perfectly legal, the format meant that ADP, which would be processing proxy material for more than 85 percent of HJ Heinz shareholders, could not process internet and telephone voting.

This summer’s high-profile Heinz proxy contest, already acrimonious, had just found a new outlet for spin and mudslinging. The split-slate proxy card format would ultimately lead to the inability of retail shareholders with ‘street name’ holdings – representing about 22 percent of the condiment king’s outstanding stock – to vote via the phone or internet for almost a week.

The road to the impasse actually began back in October 1992, when the SEC revised its proxy rules to make it easier for shareholders to vote for a dissident without jeopardizing their voting power for management nominees. Today, while not mentioning them specifically by name on the card itself, a dissident group’s proxy in a short-slate contest may be voted for select management nominees as well. But the SEC rule-making hadn’t foreseen the advent of electronic voting or the mischief of circumstance.

Here’s what happened at Heinz. When ADP took delivery of management’s proxy materials on July 10, no counter-solicitation materials had been received and ADP distributed them in normal course with all voting alternatives available (internet, telephone and paper along with ADP’s ProxyEdge platform for institutions). A week later, the dissident solicitation materials arrived, including a gold proxy card formatted as described above.

The opposition, a collection of hedge funds known as the Trian Group, owned 5.5 percent of Heinz stock (worth about $750 million). Its leader, billionaire investor Nelson Peltz, is known to have a hands-on approach to management relations at the companies he invests in, an approach he calls ‘operational activism.’ Famous for having turned around Snapple Beverage Corp with a powerful brand marketing campaign, Peltz just a few months earlier had persuaded hamburger purveyor Wendy’s International to install three Trian board nominees in a bid to streamline the company and boost shareholder returns. Peltz had similar designs for Heinz, but management would have nothing of it, calling the Trian plan too aggressive and its nominees neither independent nor qualified. As tempers flared in dueling press releases, it became evident that an accord would not be reached.

When it came to the contest, Trian challenged five Heinz directors with its own candidates and in essence supported seven of the twelve Heinz directors (although shareholders would have to hunt through the proxy statement to find out which ones). But what if you wanted to withhold on one of those seven? And what if you wanted to do it by phone? Schifellite explains the problem this way: With phone voting, you press a number on the phone representing director choices that correspond to the voting instruction form. However, if the card does not list the seven uncontested directors, it is virtually impossible for ADP or any other entity to design a telephone script.

It isn’t as if no one knew this was coming. In fact, conversations among ADP, Heinz, Trian and the SEC had been taking place. One solution would have been for Trian to include the seven uncontested names on its card – a move the SEC said would not bring an enforcement action. But Trian declined that option, no doubt concerned that while the SEC wouldn’t take it to task for violating proxy rules, it was still not immune from the litigation of others – Heinz, for example.

At that point, ADP consulted with several of its brokerage clients and was instructed to use a voting instruction form that followed Trian’s proxy card, even though it would result in internet and telephone voting being unavailable. ‘We couldn’t have electronic voting on one side and not the other, so we were forced to deactivate it,’ says Schifellite. Everybody involved was made aware of this required action. Everybody, it seems, but Heinz.

‘Internet voting was to go up on a certain date, and we got calls from investors saying it wasn’t working,’ says Michael Mullen, director of global affairs at Heinz. Retail shareholders with street name holdings who were trying to use ADP’s internet or phone system received an error message indicating a mistake in their proxy card’s control number. On Friday, July 21, Heinz management contacted ADP with concerns about both the unavailability of electronic voting and the message that shareholders were receiving. (ADP’s electronic voting solution for institutions was available for the entire solicitation period.)

That same day, press releases began to fly, squabbling over who was to blame for the situation. Heinz fired the first salvo, charging that ‘a combination of actions’ by both Trian and ADP had led to the breakdown of electronic voting options. ‘Trian has refused to allow ADP to format its voting instruction form in such a way that would permit internet and telephone voting for street name shareholders,’ according to the release. ‘Additionally, street name shareholders trying to use the Internet or phone system receive an error message from the ADP system that their control number on their proxy card is wrong, when the real issue is that the Internet and phone system at ADP is not working.’ In the meantime, Heinz urged its shareholders to vote by mail.

Later in the day, Trian responded by calling the Heinz statement absurd. ‘It is not a matter of cooperation‚ as Heinz falsely states,’ said Trian’s press release, which pointed the finger at ADP’s system. ‘Heinz is well aware, and has known for some time, that [ADP’s vote processing system] does not support internet and telephone voting of shares held through brokers and other intermediaries when shareholders are seeking to elect only a minority slate of directors.’ Trian’s statement concluded, ‘The fact that Heinz would try to blame the Trian Group for a third party’s internal processing matter is simply absurd and a desperate act.’

Blame aside, this would not be the first time that quirks in the proxy process obfuscated voting. Through cunning or luck, Trian could count on a significant bloc of shareholders – who conventional wisdom suggested would favor management – to be prevented from choosing the manner and moment of their vote.

‘If a retail investor still can’t vote after two or three attempts, then the chances of them trying again are questionable,’ says Beth Young, senior research associate at governance and compensation advisor The Corporate Library. ‘People have other things on their mind.’

Young, with experience in successful dissident campaigns, cautions against the notion that retail investors will consistently vote for management. ‘If properly solicited, retail investors can be persuaded to vote in significant numbers against management,’ says Young. ‘If you were a dissident, you would basically have to write off those votes. I don’t know that anyone wants to do that as a conscious strategy.’

Whatever Trian’s fortunes in this instance, it has been playing a strong and skillful game right off the blocks, its succinct operational critique of Heinz resonating unusually strongly with both retail and institutional investors. ‘There used to be a solid sense of what was going to be a successful dissident campaign,’ says Young. ‘But the game has changed and the old rules of thumb we used to use to gauge the seriousness of challenges may no longer be appropriate. It may be time [for companies] to proactively err on the side of caution when evaluating threats.’

Heinz worked with its banks JPMorgan and UBS to devise a strategic business plan to counter Trian’s. At the same time, it made a number of shareholder-friendly overtures (including a promise to repurchase shares and increase dividends, which immediately prompted Moody’s to put Heinz’s long-term debt ratings under review for a possible downgrade), but Young believes that management’s concessions were too little too late to entirely derail the dissident campaign.

‘If Heinz had said more of the things that institutions were looking for earlier, then the crucial momentum that Trian got in this campaign might not have happened,’ she speculates.

Building a workable solution

ADP quickly corrected the message that would-be electronic voters were getting. Still unresolved, however, was the problem of casting the votes. ‘When the option to have the five management nominees as well as the seven uncontested listed on the opposition card was not accepted, we asked ourselves what we could do to make more voting options available to shareholders,’ says Schifellite. ‘Our systems group immediately set out to find a solution.’

That solution involved building a computer program that created a write-in line for internet voting with shareholders responsible for coming up with the names. Tested over the weekend, the customized system was rolled out the following Tuesday with the approval of ADP’s bank and broker clients and the knowledge of the SEC.

Telephone voting proved somewhat trickier. By Friday, however, a system was devised that allowed phone voting in its entirety for management. Phone voting was also available for the opposition, except for shareholders wanting to withhold a vote for the uncontested management nominees. Those shareholders got a recorded message telling them to vote by mail or the internet.

Trian found this arrangement, which allowed all voting options on one card and not the other, unfair. It convinced several brokers to ask ADP to disable the telephone voting system. But ADP, according to Schifellite, demonstrated it had a viable solution that was clear for all shareholders‚ and therefore was told to re-enable phone voting (with the brokers getting the option for their firm’s customers to be excluded – which none chose).

‘Some might say we should have thought ahead about how we’d accommodate these circumstances,’ says Schifellite. ‘I accept that. But once it was presented to us, we reacted fast and executed flawlessly.’

ADP’s solution to the impasse was deceptively simple. If you couldn’t put all twelve management nominees on the dissident proxy card, then just put them on the voting instruction form that brokers exchanged with the company’s beneficial owners, a medium within the voting process chain overseen neither by the SEC nor state law.

Indeed, in its assumed role as a neutral third party, ADP walked a tightrope while being pulled from numerous sides. But in the end, its market solution, perhaps awkward and somewhat tilted, appears to have been effective. And while most of the involved parties would almost certainly prefer a market-driven solution, a regulatory void clearly exists.

When the showdown came on August 16, Trian’s short-slate strategy won it two seats on the board. Despite murmurs of cooperative intent, it remains to be seen whether these new directors can work effectively with the other board members. And while a single battle in the campaign has been waged, also uncertain is the requirement – fundamental to corporate democracy – that shareholders can vote for who they want, how they want.