Earlier this week Greenlight Capital, Inc. filed proxy solicitation materials for General Motors’ 2017 annual meeting of shareholders to propose splitting GM’s common stock into two separately traded common stock classes. One class, called the “dividend shares,” would pay quarterly dividends at the current annual rate to appeal to yield-focused investors, and the second class, called the “capital appreciation shares,” would entitle the holders to all additional earnings, cash flows, share buybacks and future growth, as well as the majority of voting rights, to appeal to investors focused on GM’s growth prospects.
In its rejection of the proposal, GM’s press release stated that a dual-class common stock structure of this nature was “unprecedented” and “creates an unacceptable level of risk.” It cited “unknown and uncertain market demand and liquidity” for the proposed shares and raised concerns about corporate governance challenges that could arise from having two groups of shareholders with divergent objectives.
Ironically, this is what small cap company boards and management have been dealing with for years in terms of stock price volatility, multiple equity interests from continual financing transactions and conflicted fiduciary obligations to divergent public shareholder and investor interests. In the small-cap realm, balance sheets are often structured with dividend-paying preferred stock or interest-bearing convertible notes (effectively functioning as Greenlight’s proposed dividend shares), which are held by income-oriented institutional PIPE and private equity fund investors, while the common stock is held by value-focused founders and public shareholders. In many situations, investors are also able to retain optionality between these two investment objectives by holding convertible preferred stock that pays a dividend in cash or in-kind, and is convertible at any time into common stock.
Small-cap boards of directors similarly struggle with complex governance challenges. Small-cap boards, in exercising their state law fiduciary obligations to the corporation and all of its shareholders, are required to consider the divergent expectations and interests of both public shareholders and investors. This challenge is compounded when directors are appointed to boards by large or controlling investors, in some instances pursuant to contractual rights they hold to nominate a designee. Dealing with conflicts of interest is often a common part of a small-cap board’s decision-making process on strategic, financing and capital allocation matters, not unlike what Greenlight is proposing for GM.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...