GM-Greenlight proxy battle comes to vote Tuesday

Melissa Burden
The Detroit News

For two months, nearly 600 General Motors Co. institutional shareholders and thousands of smaller shareholders have been barraged with letters, proposals, rebuttals, dueling proxy websites – and green and white voting cards.

It’s all part of a battle between the Detroit automaker and activist investor Greenlight Capital Inc. and its president, billionaire David Einhorn. Greenlight and Einhorn want to split GM’s stock into two equities because they say it will create tens of billions of dollars in shareholder value. They also want to unseat three members of the board of directors and replace them with their own candidates.

The proxy fight comes to a culmination Tuesday at GM’s annual shareholders meeting in Detroit. Shareholders will choose to vote a white proxy card in favor of GM’s position, or a green card to support Greenlight’s proposal and slate of board candidates, unseating three current GM board members. GM declined to provide a tally on voting while votes are still being cast.

On Tuesday, shareholders will choose to vote a white proxy card in favor of GM’s position, or a green card to support Greenlight’s proposal and slate of board candidates, unseating three current GM board members.

The hedge fund, which owns about 52 million shares or 3.6 percent of GM stock, says its aim is to unlock value in GM’s stagnant stock price. More than six years after its initial public offering, GM stock is trading only slightly above that $33 a share price, despite record earnings; the S&P 500 index has more than doubled during that period. GM stock closed up 2 cents at $34.45 a share on Friday.

After months of talks with GM, Greenlight announced in late March it wants to create one class of GM stock to receive dividends on the traditional business – and another class of stock to participate in earnings, cash flow and future growth. The hedge fund has said it believes GM could lower its cost of capital and unlock between $13 billion and $38 billion in shareholder value.

GM rejected the proposal after what it called thorough review, calling it “an experiment in financial engineering” that poses the risk of losing investment-grade credit ratings. It said two classes of stock create governance challenges.

The proposal comes at a time when traditional automotive stocks haven’t fared well with Wall Street. Meanwhile, Silicon Valley tech company and electric-vehicle maker Tesla Inc. has seen its stock price jump more than 56 percent this year, closing Friday at nearly $340 a share. Earlier this year, Tesla surpassed both Ford and GM in market capitalization – the valuation of a company defined by the number of shares multiplied by the stock price.

Einhorn was not available for an interview, but on Bloomberg Television on Friday he criticized GM, saying it had a weak capital structure.

“It has a balance sheet that’s fundamentally too conservative for the value that’s created in the operations to be unlocked,” he said, citing a $50 billion market cap and GM’s $20 billion of cash, plus available credit.

“Something needs to be done to unlock the value at GM,” Einhorn added.

A representative from Greenlight is expected to attend the shareholders meeting, but it is not clear if that will be Einhorn.

Risks to credit rating

At the end of May, two proxy advisory-service companies, Glass Lewis and Institutional Shareholder Services, issued reports supporting GM’s position to vote against Greenlight’s proposal.

Earlier, Moody’s Investors Service said that if the proposal is adopted it would hurt credit ratings for GM and subsidiaries, cut its financial flexibility and boost credit risk. S&P Global Ratings said if GM created two classes of stock, it would lower GM’s credit ratings to below investment grade.

GM Chairman and CEO Mary Barra, in a question-and-answer with shareholders last month, said from 2012 through the end of 2017, GM expects to have delivered $25 billion in dividends and stock repurchases to shareholders. GM agrees its stock is undervalued but says the Greenlight proposal is too risky.

“Ultimately, after many months of careful study, we concluded that, in stark contrast to the work we are doing, the high-risk financial engineering experiment Greenlight has proposed would reduce our flexibility without generating any intrinsic value or operational growth in our business and would be detrimental to our shareholders,” she said.

Einhorn and Greenlight Capital want three new candidates be added to GM’s board: Leo Hindery Jr., managing partner of private equity investment firm InterMedia Partners LLC; Vinit Sethi, vice president and director of research at Greenlight Capital; and William N. Thorndike Jr., managing director of Housatonic Partners, a private equity investment company. If shareholders vote for those candidates they could unseat Jane L. Mendillo, Michael G. Mullen and Carol M. Stephenson.

Mendillo, retired president and CEO of the Harvard Management Co. that oversees Harvard’s endowment fund, joined GM’s board last year. Mullen, a retired Navy admiral who is a former chairman of the Joint Chiefs of Staff, joined the board in 2003. Stephenson, a retired dean at the University of Western Ontario, has been on the board since 2009.

Greenlight declined to comment about why those three GM board members were targeted. Einhorn said in a May 30 letter to shareholders that his slate of candidates are highly qualified and would “bring desperately needed fresh thinking and new perspectives to the board.”

‘Cure ... is pretty iffy’

David Kudla, CEO and chief investment strategist of Mainstay Capital Management LLC in Grand Blanc, thinks Einhorn is looking for a short-term bump in the stock price and doesn’t think the proposal – which Kudla described as “financial tomfoolery” – will be approved by shareholders.

“He’s talking about the stock like it’s a product,” Kudla said. “It’s not a product. GM should not be in the business of financial engineering. GM should be in the business of engineering, building and selling great cars and trucks. That’s what matters for the long term of the company.”

Erik Gordon, professor at the University of Michigan’s Ross School of Business, said a vote in favor of Greenlight’s proposal would be a vote of “no confidence” in Barra.

“His cure for the stock moving is pretty iffy,” Gordon said. “Splitting into these two kinds of stock might unlock value, (but) it actually might hurt GM and therefore hurt the value of the stock.”

All 11 current GM board members are up for re-election to one-year terms. Shareholders also will vote on executive compensation; GM’s 2017 short-term incentive plan for executive compensation and 2017 long-term incentive plan for executive pay; and a shareholder proposal to have an independent board member serve as chair of the board.