Stratus Properties & Oasis Argue Over What Chills Shareholder Engagement

Disclaimer: https://www.transactionaldelights.com/disclaimers

Stratus Properties ($STRS) and Oasis are currently in the middle of a public engagement with some history. A few years ago, Oasis signed a standstill with STRS for a board seat. A few months after that STRS concluded its strategic review and made a decision not to sell. And just in September, Oasis’ designee resigned from the Board and Oasis terminated the standstill due to a disagreement with STRS’ strategic plan and STRS’ decision to convert into a REIT. Following the resignation, STRS adopted a pill to protect the transaction into a REIT, and Oasis penned a public letter.

Now, between the two of them is an interesting legal argument regarding the scope of the defensive maneuver:

Oasis states that the pill as enacted chills shareholder engagement. They are pointing to a provision in the pill under the definition of “Acting in Concert” that states:

A Person shall be deemed to be “Acting in Concert” with another Person if such first-mentioned Person knowingly acts (whether or not pursuant to an express agreement, arrangement or understanding) in concert or in parallel with such other Person, or towards a common goal with such other Person, relating to (i) acquiring, holding, voting or disposing of voting securities of the Company or (ii) changing or influencing the control of the Company or in connection with or as a participant in any transaction having that purpose or effect, where (A) each Person is conscious of the other Person’s conduct or intent and this awareness is an element in their decision-making processes and (B) at least one additional factor supports a determination by the Board that such Persons intended to act in concert or in parallel, which such additional factors may include exchanging information, attending meetings, conducting discussions or making or soliciting invitations to act in concert or in parallel. A Person who is Acting in Concert with another Person shall be deemed to be Acting in Concert with any third Person who is Acting in Concert with such other Person.

STRS states that Oasis is wrong: “But in reaching this erroneous conclusion you tellingly omit that the Rights Agreement permits stockholders to engage in communications relating to a proxy contest”. STRS is pointing to a provision in the pill that specifically excludes a solicitation from the definition of “Beneficial Owner”:

A Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “Beneficially Own” and have “Beneficial Ownership” of any securities (that are as such, “Beneficially Owned”)… that are Beneficially Owned, directly or indirectly, by any other Person (or any Related Person of such Person) with which such Person (or any Related Person of such Person) (A) is Acting in Concert or (B) has any agreement, arrangement, or understanding (whether or not in writing and other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities); provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially own,” any security if such agreement, arrangement, or understanding (A) arises solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act Regulations and (B) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report)

So, who is right here? Let me start by speaking generally. I’ve been on both the investor side and the company side, and I can tell you that an acting in concert provision is highly controversial and tends to enflame a company’s shareholder base. In my view and generally speaking, taking such an action is a very short-term approach to what should be a long-term solution, and usually when a company takes this action, they are looking at it from a narrow legal standpoint. This an especially important calculation because the company’s course of action may be right on substantive grounds, and a legal action like this can tilt how the investor base looks at an issue, objectively speaking.

In today’s world, where proactive shareholder engagement is incredibly important for forward looking companies and the foundation for shareholder engagement from the company side begins with a good IR team, an acting in concert provision shouldn’t really be something that is considered except in the most extreme circumstances. But, that advice mostly applies to larger cap companies, and not smaller cap companies that may not have the concentrated institutional investor base needed to shine a spotlight on an issue like this.

Are there times when utilizing an acting in concert provision is appropriate? Yes. And I must admit that I have advised companies to adopt an acting in concert provision, but only in very narrow circumstances when there are no options left, and when the threat is a very unusual shareholder activist. I get that a traditional pill does little to stop a shareholder activist. I am sympathetic to its use, but it really is the ultimate double-edged sword, and one where the longer-term perspective is far sharper than the short-term gain unless it is truly existential. And, maybe it is here. I am on the outside looking at this one and there are always things going on behind the scenes that the public does not have a view on.  

And what about STRS and Oasis specifically? Well, STRS stating that it is restricting the acting in concert portion so that it doesn’t apply to the solicitation of proxies is not really a favor, because the solicitation of proxies is always a carve-out in pills. There are many ways that shareholders engage and it is not just in the solicitation of proxies. Most informal shareholder engagement fall short of triggering a 13D group. On the flip side, there are many forms of informal shareholder communication that an acting in concert provision could pick up and therefore chill.

When I read STRS’ response, my read is that STRS is seeking optionality to address an undefined threat. It does give some clarity to how it would interpret the provision, but many of the words and concepts are still very much open to interpretation. What is an “ordinary course activity and communication” / “meeting and communicating with other shareholders to share concerns about the Company” vs. “working towards a common goal” or “acting in parallel”? How do you draw the line between those words and concepts? In my view, the STRS response is PR for IR.

Even as circumscribed (by STRS’ letter), STRS would retain the ability to combat any perceived shareholder threat because an acting in concert provision is by definition vague and broad. What is the threat specifically? It is hard to say, and instead of trying to thread that needle STRS can kick the can because the STRS board maintains the ultimate ability to interpret the pill and any provision in the pill.   

So, let’s see what happens. STRS is incorporated in Delaware, a state where the provision Oasis is looking at is being litigated.