Proxy Statements: Form PREC14A

WHAT IT IS

Form PREC14A is the form that rebellious shareholders use to make their demands — and the one that corporations use to respond. Here’s how it works: Annual or special meetings generally allow shareholders to vote on new members for the board of directors as well as any changes to corporate bylaws. The shareholders receive background information on these issues via Form 14A, otherwise known as a proxy statement. If a major shareholder objects to the company’s direction, and therefore to its proposed directors or bylaws, he or she can initiate a proxy contest — essentially proposing his or her own slate of directors or bylaw changes. The details are filed on Form PREC14A.

Form PREC14A typically contains the following information:

• A description of the dissident shareholder’s platform — why he believes management’s proposals should be rejected.
• The dissident shareholder’s competing proposals, including the specific bylaws and/or directors he wishes to submit.
• Voting information and deadlines.
• Contact information for the “consent solicitor,” or the firm the dissident shareholder has engaged to run the proxy contest.
• Records of recent transactions in the company’s stock made by the dissident shareholder.

What to Look For

Here are a few things to bear in mind when you’re perusing this form:

Understand the issue at hand. In 2009 legendary shareholder activist Carl Icahn filed a PREC14A prior to the annual meeting of Biogen Idec (BIIB). Many non-management proxies lay out — at least briefly — the shareholder’s reasons for starting a proxy contest. While Icahn’s proxy named the four directors he proposed, it did not go into detail about why he thought they should be elected. A quick Google search revealed that Icahn wanted Biogen to make stronger efforts to find a buyer for the company. He hoped to gain control of board seats in order to push management toward a sale.

Keep an eye out for subsequent filings. In a proxy contest, you’re likely to see lots of documents filed by both management and the dissident shareholder — press releases, letters back and forth and materials that each side feels will bolster its case. In addition, the company will file its own PREC14A in response to the dissident’s filings. Monitor the various filings to better understand the dispute, and the various parties’ take on the company’s prospects.

Look into the dissident shareholder’s background. Corporations often fight a proxy contest by discrediting the person who started it, says Steve Wolosky, a New York attorney who has advised clients on dozens of proxy contests in recent years. Don’t just take their word for it — do your own research to determine the credibility of the shareholder running the proxy contest. For example, American Express shareholders might be alarmed by the half-dozen PREC14As filed in 2009. However, a cursory look at the forms shows that they were all generated by one former AmEx employee who is nominating himself as a director — and who has sued the company multiple times over an employment-related matter.

*Footnote:

Companies often settle proxy contests by making changes that address at least some of the issues raised by the dissident shareholder. For example, Wolosky recently advised Ramius, LLC on its efforts to gain two seats on the board of directors at Agilysys, Inc (AGYS). Two weeks prior to Agilysys’ annual meeting — and following a four-month proxy contest — the parties agreed to a settlement in which two Ramius nominees were named to the board.