After taking a break this past proxy season, “golden leash” arrangements are back in the spotlight. A few days ago, Third Point LLC proposed so-called “golden leash” arrangements for their two nominees to the board of Dow Chemical Co.
“Golden leash” arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of the target corporation. Arrangements vary but include compensating activist directors who are elected based on achieving benchmarks, such as an increase in share price over a fixed term. Shareholder activists only provide such incentives to elected activist directors, not re-elected incumbent directors. See our prior articles for more background, ISS’s position, and the Council of Institutional Investors’ position.
Third Point is considering launching a proxy contest at Dow’s meeting next year. The nominee directors it proposed were apparently rebuffed by Dow after months of negotiations. It is rumoured, according to the Wall Street Journal, that negotiations over board seats broke down in part because Third Point wanted to enter into “golden leash” arrangements with its nominees.
Third Point’s SEC filing discloses that its two nominees:
- have received a cash payment from Third Point equal to $250,000 in consideration for their agreement to serve as nominees;
- will receive a second cash payment from Third Point equal to $250,000 in the event that the nominee is appointed as a director, regardless of whether this occurs by election or settlement;
- have agreed to invest their second payment of $250,000 in Dow shares if the nominee does not own at least $250,000 of Dow shares at the time of such payment; and
- may be entitled to two additional cash payments from Third Point subject to Dow’s share price appreciating three years and five years after they join the board – regardless of whether Third Point remains a shareholder.
During the 2013 proxy season, Jana Partners LLC and Elliott Management Corp. proposed “golden leash” arrangements for their nominees to the boards of Agrium Inc. and Hess Corporation, respectively. Jana was unsuccessful and Elliot settled its proxy fight.
If Third Point launches a proxy contest against Dow’s board, only time will tell whether the third time’s the charm for shareholder activists who argue that “golden leash” arrangements are an important tool to link director pay to target company performance, which they say can benefit all investors.