Einhorn’s GM plan poses challenge for board
Hedge Fund Manager David Einhorn’s unusual plan to divide General Motors Co’s shares into two classes poses a potential corporate governance minefield for GM board members. The shareholder proposal, quickly rejected by the company last week, is aimed at boosting a lagging stock price, but did not appear to catch fire with other existing or prospective shareholders, who see it as an growth stock camp. odd mix of hybrid security schemes. “It puts the board in an odd position,”
The plan would create one class of stock said Charles Elson, a University of Delaware for investors keen to capture GM’s juicy corporate governance professor who also sits dividend, and a second for those eager to on the board of restaurant chain Bob Evans bet on its growth potential. Einhorn, who Farms Inc. “Do you plow money back into runs New York-based Greenlight Capital, the business, or buy back the stock — You has pledged to fight for it at the company’s end up penalizing at least one of the stock annual meeting and plans to nominate a holders. It gets messy.” slate of directors ready to advance his idea. Dividend holders would get one-tenth of
One obstacle cited by legal and financial a vote under the Einhorn plan, while the so advisers is the probable conflict it presents called “capital appreciation” owners would for GM’s directors, who under Delaware law have a full share. are required to be loyal to all shareholders. While all public company boards That could get tricky under Einhorn’s plan as encounter tension when evaluating directors would oversee two classes of stock short-and long-term goals, “separating that each have voting powers but competing out dividend-paying shares makes those ambitions for use of company capital. tensions explicit, pitting actually different
For instance, directors would have to stockholders against each other,” Delaware square voting to raise quarterly payouts, Law School professor Larry Hamermesh said.whichwouldexclusivelybenefitthe dividend stock holders, versus allocating Hamermesh added that such a structure more towards capital expenditures or could become more troublesome in terms of stock repurchases, which would benefit the conflicts if the board’s stock holdings were concentrated more in one class of stock.
Investors — even some GM holders frustrated by its persistent underperformance since its shares returned to public markets in 2010 after a wrenching reorganization in bankruptcy — were not immediately lining up in support of Einhorn’s idea.
“I agree completely that the stock is undervalued, but I’m not sure that splitting it into two classes is going to drive it any higher,” said Scott Moore, co-portfolio manager of the Buffalo Dividend Focus fund, who owns shares of GM. Moore said he doesn’t want to have to choose between dividend income and stock price appreciation. He wants both.
So far, GM shares have not seen a big response to the Einhorn proposal. The stock gained about 2.5 per cent on Tuesday after it was made public but ended little changed on Wednesday.
Mark Freeman, Chief Investment Officer of Westwood Holdings Group, who does not own GM, said he would not buy a dividendfocused share class that was not a preferred stock. Preferreds stand between common shares and debt in a company capital structure and offer a greater likelihood that investors will have a claim on assets in the event of a bankruptcy.
Einhorn’s plan has flavours of several existing hybrid equity security types, such as tracking stocks, perpetual preferred shares and master limited partnerships, but does not exactly replicate any of them.