CLS Blue Sky Blog

Who Re-Classifies a Board of Directors?

Classified boards of directors (BoD) remain one of the sorest of sore spots about portfolio companies. Investors complain about them endlessly. Proxy advisors loathe them. Shareholder proposals to de-classify tend to succeed.

Sure, many new IPOs and de-SPAC companies start with a classified BoD. Many (but hardly most) of the S&P 500 have declassified their BoD, if they didn’t already have a single-class one. Somewhat fewer smaller-cap companies have done so.

So, why would a company re-classify a single-class BoD? How does that happen?

One company did this to make life hard for an activist investor, of course. In a lesser-known activist situation this year, Zuma Capital sought some badly-needed change at Presidio Property Trust (SQFT). This situation features one of the only board re-classifications that we’ve seen in a few years, applied in a aggressively creative way.

Zuma owns about 2% of SQFT, and formed a group that reached about 7%. In December 2023 it notified SQFT of its intention to nominate five candidates for election to six spots on the BoD. Nominees included Zuma principal Brent Morrison, the PM from another group member, and three others. Zuma sent a letter to shareholders and launched a contest website. Pretty standard stuff.

In March 2024, the SQFT BoD voted to reclassify itself. It can do that under Maryland law. It didn’t need (or seek) shareholder approval. It divided its six-person BoD into three two-person classes. Another reason to avoid Maryland corporations…

Next, in April 2024 SQFT rejected the Zuma notice of nomination. Why? Because Zuma nominated five people for only two BoD spots! Zuma quickly revised its notice to include only Morrison and the other PM. SQFT then rejected the amended notice.

Zuma could have litigated either or both of the reclassification or the rejected notice. It had a decent chance of prevailing. Yet, who wants to incur the considerable expense to contest this in the same state that allows companies to classify a BoD without a shareholder vote?

Zuma ended up settling the proxy contest. SQFT appointed the other PM to the BoD, adding a seventh director. Zuma accepted a comprehensive standstill and recovered some of its expenses.

We could find only three examples of companies re-classifying a previous single class-BoD (MULN, MYSZ, and CRGE) since 2020. None of them involved a proxy contest or other activist situation.

As this activist defense strategy goes, it certainly helps to have a Maryland domicile. Other states likely require shareholder approval, which the other three companies did achieve.

The SQFT AGM occurs on June 27. Shareholders evidently want change. Proxy advisors have not yet rendered an opinion, and we expect they will treat the company harshly. The company already is scrambling to attract votes even for a quorum, over three weeks before the AGM.

This situation bears watching, if only to see what other novel tactics SQFT might try next.

This post comes to us from Michael R. Levin, founder and editor of The Activist Investor.

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