(This story has been corrected to show in the 16th paragraph that Minow said compensation proposals instead of confirmation proposals.)
It's hard to imagine Google (GOOG) meeting resistance to a proposed acquisition, but that's what happened in late 2009. Even more surprising, it was a startup Web site that had launched just a month earlier that gave a voice to retail shareholders of the target company, making it easier for them to participate in the proxy vote to oppose the deal.
Because of a campaign by activist shareholders, On2 Technologies (ONT), a provider of video compression software and related services, has yet to secure approval of the merger by shareholders representing more than 50% of its outstanding shares. Angered by management's acceptance of what they deemed an undervalued offer from Google last August, a group of On2 investors got busy on private message boards and steered fellow shareholders toward MoxyVote.com, a new Web site committed to educating and empowering retail investors by simplifying the complicated proxy voting process and enabling them to vote online.
John Marcoux, an engineer who owns close to 1 million shares of On2, learned about Moxy Vote rather late in his online effort to gather a group of shareholders pushing for a better valuation of On2's shares. With less than two weeks to go before a special shareholder meeting on Dec. 18 to vote on the merger, Marcoux and other activist shareholders managed to round up several hundred votes representing about 22 million shares, or about 12.3% of On2's 178.2 million total outstanding shares, to cast ballots on Moxy Vote.
"That was pretty impressive," he says. Although he hasn't seen a final count of the Moxy Vote ballots, he knows the vote "was very, very, very strongly opposed [to the merger]. Most of the people who went there to vote were being contacted by [people] opposed to the merger."
After failing again at a Dec. 23 meeting to get the requisite number of votes, On2 rescheduled the vote for Feb. 17, 2010. In the meantime, on Jan. 7, Google sweetened its offer, adding 15 cents a share in cash to its prior all-stock bid of $106 million, or 0.001 shares of Google for each share of On2, boosting the deal's value to $133 million. On2 also pushed back the record date for shareholders to be eligible to vote to Jan. 15.
Marcoux stops short of giving Moxy Vote most of the credit for Google's higher offer, but he believes the Web site was part of a combined effort by dissident investors (which included articles in publications such as the Financial Times), to which the revised bid was a response.
While Marcoux and other shareholders feel Google's offer still undervalues On2's stock, they're no longer trying to get shareholders to vote on Moxy Vote due to some "behind-the-scenes" developments he declined to discuss. "I'm grateful that Moxy Vote has a [platform] that let us come together and speak our voice and its role got the attention of Google that this [deal] wasn't going to pass unless they did something."
Retail shareholders have historically been a disparate group, difficult to corral and activate, and the On2 merger vote was the first instance of them coming together to form a voting bloc online, says Doug Gates, vice-president of marketing at Moxy Vote. Unlike the experience of most startups, which can spend months and months wondering if anyone will use their service, "this is pretty good validation that we might be onto something," he says.
Advocates Guide Shareholders
Other Web sites such as www.ShareOwners.org and www.ProxyDemocracy.org are also dedicated to educating individual investors, but Moxy Vote is the only one that actually enables people to vote on corporate actions online. The company doesn't generate any revenue and its business model is still under consideration.
So far, 21 organizations have signed up as advocates on Moxy Vote, from philanthropic organizations such as The Nathan Cummings Foundation to the International Brotherhood of Teamsters and religious-affiliated investor groups like Christian Brothers Investment Services. Being an advocate means they not only can express their view on a certain shareholder proposal but can serve as guide for shareholders who can automatically align their vote with an advocate they trust.
The average retail shareholder needs both guidance and assistance to overcome his apathy to voting on corporate actions, says Kevin Gates, Doug's brother and a money manager at TFS Capital in West Chester, Pa., the majority investor in MoxyVote.com. While Gates says he's interested in shareholder resolutions, he admits that even he tends to throw away most of the proxy ballots that come in the mail for his own portfolio. He likens the proposal summaries available on Moxy Vote to CliffsNotes that condense the information to a digestible size and format that's more likely to engage his interest.
Shareholders can use the control number on a proxy statement they get in the mail to vote on Moxy Vote on a ballot-by-ballot basis or set it up so that their brokerage will automatically direct ballots on stocks they own to the Web site. A user can search for a company under the ballots and be taken to a page that shows the date of an upcoming shareholders meeting and the dates when online voting starts and ends. It also shows how many shareholder and board proposals are on the ballot, as well as which board members are up for reelection.
The primary empowering feature is the ability to set your vote to a default that automatically aligns it with a trusted advocate. A shareholder who is a vegetarian and cares about animal cruelty, like Kevin Gates's wife, for example, can set her vote for whatever The Humane Society suggests, or if that group hasn't posted an opinion on a given ballot, for the recommendation of another animal rights advocate. "It's a one-time setup process" that can be run on auto-pilot, says Kevin Gates. "People who don't care too much about corporate governance, even if they invest 30 minutes of their time, it could be a long-term investment [value for them]."
He expects the site to add many new advocates over the next six to 12 months that will expand the menu of experts whose knowledge individual shareholders can tap. If no advocates have posted an opinion about a ballot proposal, users can set their default to abstain or vote with or against the company's management.
Users can also click to override a previous vote as long as voting is open.
Nell Minow, editor and co-founder of The Corporate Library, an independent research group, believes the advocate default option will give a lot more investors confidence to participate in corporate voting. "For the investor who says, 'I'd like to be smarter about these compensation proposals to vote on,' it's wonderful to have a resource to go to where Moxy Vote will tell you this is how Sierra Club is voting or what the Teamsters are telling you," she says. "You can get a free ride on their due diligence."
Proxy Access Rule
While shareholder activism tends to be viewed as progressive in character, Doug Gates says Moxy Vote is trying to attract advocates from across the political spectrum. "We don't want to be painted as too progressive or too liberal, because we just want to host the debate. But the reality is most advocates are progressive so they outnumber the conservative ones on the site."
It's not only the Internet but a series of anticipated regulatory changes that hold promise for the enhanced importance of individual shareholders when it comes to corporate voting actions, says Minow. An upcoming proxy access rule, announced in June 2009 by the U.S. Securities & Exchange Commission, would enable shareholders to nominate an alternate slate of directors essentially at a company's expense by forcing the company to post the alternate nominees' names on the same proxy cards the company sends to all shareholders. Until now, it has been prohibitively expensive for activist shareholders to run an opposing slate of board candidates, says Minow.
"This will make it possible for shareholders to challenge corporate directors in a meaningful way. When that happens, each vote becomes much, much more valuable, more complicated, and more in need of the guidance that Moxy Vote will try to give," she says. "This is getting corporate America where they live." So much so that the U.S. Chamber of Commerce has already said it will sue to challenge the rule once it comes out, she adds.
Eric Cohen, chairman of Boston-based Investors Against Genocide, one of the 21 advocates on Moxy Vote, sees the Web site as a necessary corrective to some of the factors that stack the deck against shareholder proposals. Among these factors is an SEC rule that requires a clear and fair statement of a shareholder resolution on a ballot except where shares are "being held in Street name" by a broker. Cohen says he was shocked to find that when Broadridge, the firm most brokers use to communicate to shareholders, sent out voting instructions to American Funds investors last year, it didn't include a single word of the sentence Cohen's group had drawn up to describe its resolution calling for American Funds not to invest in companies the group considered to be complicit in genocide.
Mutual Fund Use
Minow also thinks Moxy Vote could be useful in forcing mutual funds to vote more in line with individual shareholders' interests. "I'd like to see not just individual investors voting through Moxy Vote but looking at what the votes are and going back to their mutual funds and saying, 'I'd like to know why you're not voting this way,' " such as concerning funds' widespread approval of executive pay packages without regard for performance.
While Moxy Vote no longer has a role in the On2/Google deal, Marcoux says he and a couple of like-minded partners intend to band together to become an advocate on the Web site. He sees the platform as revolutionary in that it has the potential to allow individual investors to unite their voices against abusive practices by corporate executives that ignore shareholders' interests.
"It's very difficult for shareholders to have a voice in this big corporate process," he says. "Moxy Vote will be a place where individuals can come together and make their opinion heard."