Media giant Time Warner (NYSE:TWX) is making itself more shareholder-friendly.
Late last month, the company's board of directors amended its by-laws, adopting a new rule that should give long-term shareholders a greater degree of control over management. The resolution comes at an interesting time for the company; widespread reports indicate that activist investors are considering making a play for the future of the firm. The resolution seems to lend some credence to those reports, and it's a development Time Warner shareholders should watch closely.
3% for 3 years
Time Warner shareholders have always had the final say on the composition of the company's board, and its new resolution doesn't change that. But going forward, shareholders who would like to see a change in the makeup of the board will be able to more easily express themselves.
Any shareholder or group of shareholders (up to 20) that owns at least 3% of Time Warner's common stock will be able to nominate board members and -- most crucially -- have their nominations (and the rationale for them) included in the company's annual proxy materials. With their nominees and rationale prominently featured, other Time Warner shareholders may choose to elect them.
There are some limitations. Most significantly, only Time Warner shareholders that have held their position for at least three years can make use of this rule. Moreover, they are limited to two nominees (or 20% of Time Warner's board), so they can't overturn management overnight. Still, it's a win for the rights of shareholders.
But it's not particularly novel. Other firms, including Microsoft (NASDAQ:MSFT), have enacted similar resolutions. Last summer, the Windows maker adopted an identical proposal, writing in a blog post that the decision "grew out of an open and constructive dialogue with our shareholders," and that it struck "the right balance for Microsoft by ensuring that Board nominees are supported by long-term shareholders."
Both resolutions mimic SEC Rule 14a-11, a rule that would've given shareholders of many public companies the right to nominate new board members and have their nominations included in annual proxy materials. That rule was adopted by the SEC in 2010, but ultimately struck down by the courts.
Activists may be circling the company
It's unlikely that Microsoft's decision to pass its resolution was motivated by a potential activist agitator. (In fact, it came several years after its initial run-in with activist hedge fund ValueAct, which built a $2 billion stake in the company in 2013, and subsequently acquired a board seat.) But the same might not be true for Time Warner. Recent reports from The New York Post have linked both Corvex Management and Nelson Peltz's Trian Fund to the media giant. It wouldn't be surprising -- shares have performed poorly since management rejected a takeover bid in the summer of 2014.
Activists interested in Time Warner could look to sell the company outright, or break it up, perhaps spinning off its premium cable network, HBO. Time Warner's CEO Jeff Bewkes has outright rejected such proposals in the past. An activist may have to wage an aggressive campaign against the company, perhaps waging a proxy fight to replace its board of directors entirely.
By proactively taking steps to strengthen the rights of shareholders, Time Warner's management could defend itself against charges of negligence. Activists typically push for changes by arguing that current management isn't acting in the best interests of shareholders. By giving longer-term shareholders the right to influence Time Warner's board, management weakens that narrative.