Skroupa: What type of jousting goes on behind the scenes to get the bylaws fixed? How does that process go when the shareholders don’t see things going their way?

Kwawegen: If there is already a conflict between one or more shareholders and a Board that is entrenching itself, it will usually take a credible threat of a lawsuit to get the bylaws fixed. That is also what happened in Darden, where we filed a lawsuit and ultimately, after the old board was ousted, were able to undo the bylaw amendments that harmed the voting rights of all shareholders.

Skroupa: How important a role does litigation play in shareholder engagement?

Kwawegen: In my experience, litigation is an arrow in the quiver of shareholder engagement that should typically be used as a last resort. The threat of litigation to enforce investor rights positively affects the balance of power between boards and the shareholders whose interests they are supposed to protect. When we do bring a lawsuit, the stakes are high and the potential impact on shareholder rights is significant. For example, we just brought a lawsuit challenging a $50 million loan facility that a financially distressed controlling stockholder Navios Maritime Holdings (“Holdings”) imposed on its healthy subsidiary, Navios Maritime Acquisition (“Acquisition”). The loan was on absurd terms and served no purpose other than to transfer value from Acquisition up to Holdings at the expense of Acquisition’s stockholders. After we filed a complaint and injunction papers and the Court scheduled a hearing, Holdings capitulated, terminating the loan. Smart litigation preserved $50 million for Acquisition’s stockholders.

Skroupa: How often are companies open to working with you and making the process less adversarial? How does your work differ from and overlap with the established shareholder activists?

Kwawegen: The majority of companies fairly engage with their shareholders. And in those cases, my firm does not become involved.  We become involved if the process breaks down and Boards decide to use their corporate powers to insulate and entrench themselves for their personal benefit or to benefit the interests of a dominant stockholder over the interests of public stockholders. That is the exception not the rule. But in those exceptional circumstances, Boards are usually not inclined to make the process less adversarial–at least initially–because they are already in an adversarial situation. After we explain the basis for a potential lawsuit, they often understand that we are not taking sides in the underlying business dispute and are merely seeking to protect the interest of all shareholders. That understanding can form the basis for discussion to resolve the dispute, but the company and its advisors have to get over their instinct to fight us no matter what we do.

Skroupa: How can shareholders defend their voting rights when boards use entrenchment devices to preserve themselves?

Kwawegen: First they need to object. Having effective voting rights is fundamental to being a shareholder. But if objecting does not work, they should consider hiring counsel to increase the pressure, especially if the entrenchment devices are implemented while there is a dispute between shareholders and the board. Boards cannot insulate themselves from accountability by impairing fundamental shareholder rights.