On Feb. 11, The Wall Street Journal reported that General Motors (GM) was evaluating a potential nominee to its board from four hedge funds, collectively holding more than 34 million of GM’s shares. According to the report, the potential nominee’s agreement with the funds included compensation in the form of a percentage of the funds’ profits from their investment in GM. The potential nominee was seeking to join GM’s board to urge GM to return more cash to its shareholders and boost its stock price. One of the funds backing the potential nominee stated that GM had too much cash on its balance sheet, and needed to return more of its capital to shareholders through dividends and share buybacks.
In the past, GM has resisted returning cash to shareholders. GM is currently facing a number of significant near-term demands on its resources, including reserving billions of dollars to end a U.S. Department of Justice investigation in connection with its ignition recall, to address strict global emission standards to combat global warming, and to retool the Cadillac to better compete against its German counterparts. GM indicated that it would evaluate the potential nominee “based on the best interest of all shareholders.” Activist shareholders are increasingly having greater success in running slates of directors in proxy contests, targeting larger companies, and collecting significant amounts of cash to return to shareholders. GM, which is a Delaware corporation, is considering this potential hedge fund nominee to its board with the same objective, and faces the attendant conflict issues arising from the so-called potential “constituency director.”
The Conflict
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