Mellanox more advantaged than Starboard by universal card – industry advisors

27 March 2018 - 12:00 am UTC

Mellanox Technologies [NASDAQ:MLNX] could have a better chance at retaining board seats in the proxy fight against activist Starboard Value if a universal ballot is used at the company’s annual general meeting (AGM), according to several industry advisors.


The fabless semiconductor group is facing an attempt by the activist to replace nine of its 11 board members.


Starboard, a 10.6% shareholder, is running an operationally driven campaign to improve margins, cut expenses and set more ambitious financial targets for Mellanox.


Since the company is listed in the US and incorporated in Israel, it raises the question of whether a universal ballot or two proxy cards would be used at the contested vote, given that the two jurisdictions use different standards. Universal ballot means a single card will contain all the director candidates of the company and the dissident.


The company has asked shareholders to vote on proposals to use a universal ballot and plurality voting at a special meeting to be held in May. This caused a delay of the AGM to 25 July.


The advisors said shareholders are expected to overwhelmingly support the proposals at the special meeting.


Universal ballot mitigates risks


Mellanox is facing the risk of losing control over its board and the universal ballot can at least mitigate that risk, the advisors said.


Assuming Starboard has made a strong case for some type of change at Mellanox, the two-card system would see votes going to the activist to seek that change, the advisors said. But as Starboard is also going for the majority of the board, the unintended consequence could be that control of the board is also handed to the activist, as shareholders cannot split their votes, they added.


Shareholders, especially the more unsophisticated ones, can be “lazy” when voting in proxy fights, said the first advisor. They might think the activist has only a handful of strong candidates but end up voting the entire slate mechanically, he noted.


In a lot of cases, shareholders would like to support some management candidates but are forced to the dissident card by the need for change, a corporate governance specialist at an institutional fund said.


The story changes when universal ballot is in use, the advisors and corporate governance specialist agreed.


The universal ballot allows shareholders to “pick and choose” who best represents the interest of the shareholders in the boardroom, the institutional fund representative said. In a universal ballot scenario, shareholders might send a signal to the management by voting for some of the activist’s candidates but are less likely to swipe the incumbents out entirely, the second advisor said.


“In turn this might increase the odds of Starboard getting less than a full slate,” the third advisor said.


The Starboard slate includes a number of industry experts as well as the activist’s own representatives Jeffrey Smith and Peter Feld. The company expanded its board in February with the addition of two independent directors.


Changing the rules of the game in the middle of a fight should favor the camp that appears to be holding the weaker hand, the first advisor said. In contrast, the side that feels in advantage would likely want to maintain the status quo, he added.


A fourth advisor said it is important to make sure that Broadridge, the company that processes proxy voting in the US, is ready to digest a proxy contest under a universal ballot system. In a notable precedent in Canada, Broadridge had to upgrade its system to be able to process the voting in the contested election between Canadian Pacific Railway [TSE:CP] and Pershing Square Capital Management, where shareholders used a universal card to appoint directors, this advisor said.


Tactical moves


Pershing Square also called for the use of universal ballot in its fight last year against Automatic Data Processing [NYSE: ADP]. The company refused to introduce the change and easily won the vote against the activist.


The move is clearly “tactical,” the first advisor said. From a defense standpoint, Mellanox was well-advised as it is buying some time, while looking like an advocate of best governance practices, the second advisor said.


As previously reported, the company is being advised by JPMorganCredit Suisse and Latham & Watkins on defense.


In response to Mellanox’s announcement of a special meeting, Starboard accused the company of unnecessarily delaying the AGM, saying a solution to use universal ballot and plurality voting was available without the delay.


Mellanox might be thinking of using the additional time before the AGM to release preliminary 2Q results and to build on the momentum it has experienced in recent months to gain investors’ favor, a source familiar with the situation said.


Last month, Mellanox said revenue for its first quarter will come in at the top end of guidance. The improved financials and the hype coming from the Starboard fight have pushed shares up more than 16% since the start of the year.


The company’s shares are also supported by media speculation that Broadcom [NASDAQ: AVGO] could be an interested suitor after losing out on the opportunity to buy Qualcomm [NASDAQ: QCOM].


Mellanox and Starboard declined to comment.


by David Carnevali