wsj CLF
The key to an activist’s campaign against Cliffs Natural Resources Inc. may lie deep in the mining company’s bylaws.
Casablanca Capital LP is urging Cleveland-based Cliffs to split its U.S. and international operations. On Thursday, it rejected a settlement offer from Cliffs and instead nominated six directors to the company’s 11-person board.
If Casablanca succeeds, it may owe its win to a voting system at Cliffs that has all but gone extinct at other big companies.
Cliffs has what’s known as cumulative voting, which lets shareholders channel all their votes to a single candidate, rather than spreading them across an entire slate. For example, a holder of 500 shares at a company with 10 directors would have 5,000 votes, which could be cast for just one or two nominees.
Nearly half of states once required cumulative voting in corporate elections, hoping to protect minority shareholders from domineering insiders, according to Institutional Shareholder Services Inc. Today, few do. Just 18 of the S&P 500 companies have cumulative voting, down from 72 in 1996, according to ISS.
In proxy fights, the math of cumulative voting favors dissidents like Casablanca. At a company with an 11-member board, like Cliffs, an activist would need just about 9% of shares to be guaranteed at least one seat, if it funneled all its votes to a single candidate. The bigger the board, the bigger the multiplier effect, and the smaller the stake needed to assure one seat.
Lower turnout drops the bar further. Assuming only about 80% of shares are actually voted–Cliff’s historical average since 2010–Casablanca only needs about 6.7% to get one seat. With a 5.2% stake, Casablanca is nearly there already.
To play with the numbers some more, see this Cumulative Voting Calculator from Law Jock PLLC.
Cliffs seems to have sensed its own weakness. At its annual meeting last May, it asked shareholders to repeal cumulative voting and to allow the board to make future changes to the company’s bylaws without shareholder approval. Both proposals failed.
Thirty-five companies have tried a total of 39 times to eliminate cumulative voting since 2005, according to data compiled by the Conference Board and FactSet. Twenty-seven proposals passed.
Casablanca went public in January with its stake in Cliffs, urging the iron-ore miner to split in two. The company is resisting the proposal and instead has cut costs and brought in a new CEO. Cliffs shares were the worst-performing in the S&P 500 last year, falling about 46% against a 19% rise in the broader index.
Cliffs said Friday that Casablanca had rejected a settlement offer that would have let the hedge fund name two new independent directors to the board immediately and a third mutually agreed-upon director later.
“We are disappointed that Casablanca seems intent on waging a public campaign rather than continuing its private engagement with Cliffs’ board and management team,” the company said in a statement.
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