CASE STUDY

Fund Voting in a Proxy Fight

Institutional activism takes many forms, as we have seen. In most situations, mutual funds are drawn into the fray by the actions of others. Company management may put forward a proposal or initiate a structural change, or an opposition group may propose to buy the company or change the company‘s business strategy. This case study presents such a situation where mutual funds and other institutional investors were drawn into a battle between an insurgent group and company management.

This case study involves two related initiatives by an insurgent group in relation to RJR Nabisco. RJR Nabisco is a conglomerate with both a tobacco business (RJR) and a food business (Nabisco). The tobacco business was subject to a broad range of legal suits along with other tobacco companies. The insurgent group, led by Bennett LeBow and Carl Icahn, owned slightly less than 5 percent of the voting stock of RJR Nabisco. The remainder of the stock was heavily concentrated in the hands of mutual funds and other institutional investors.

In the first initiative (First Act), the insurgent group put forth two shareholder proposals: to spin off the Nabisco food business from the tobacco business and to restore the right of shareholders to call a special shareholders‘ meeting. Subsequently, in a second initiative (Second Act), the insurgent group proposed a slate of directors to replace the incumbent directors of RJR Nabisco.

In reviewing this case study and Exhibit 3, ?What Burns Holes in LeBow‘s Pockets?? assume that you are the manager of two mutual funds—Growth Fund and Environmental Growth Fund—each owning 1 percent of outstanding common stock of RJR Nabisco, which is trading at $30 per share. The Growth Fund is a $10 billion fund, and the Environmental Growth Fund is a $1 billion fund. The investment objective of the Growth Fund is to seek capital appreciation over the long term, and the investment objective of the Environmental Growth Fund is the same, while taking into account all aspects of environmental concerns.

Discussion Questions

You have been asked to vote shares of the two mutual funds on the above two shareholder resolutions and the election of directors. For each fund, please answer the following questions:

How will you vote? Will you vote the same for each fund?

What is the rationale for your vote? What is the difference between voting on shareholder resolutions and voting on director elections?

How would you evaluate the potential and probable benefits to your fund from engaging in shareholder activism on these votes? Quantify your answer to the extent feasible.

What strategies or tactics would you utilize in support of your position? Would you talk to the insurgents, company management and/or other institutional investors? Would you be prepared to solicit proxies or participate in any group actions?