General Motors has announced that its Board of Directors and management team have analyzed and rejected a proposal by investment firm Greenlight Capital to overhaul the company’s securities structure and create a dual-class common stock arrangement.
The non-binding proposal suggested eliminating the dividend on existing GM common stock and creating a new dividend-focused security, the latter being an unprecedented instrument.
GM’s due diligence on the matter involved taking seven months to review the proposal, during which time it engaged directly with Greenlight Capital, and even arranged a meeting between GM’s Board and the investment firm. The automaker also consulted with various rating agencies and solicited independent analysis from three top-tier investment banks.
Thanks But No Thanks
In its statement, GM stated that it “values the views of its owners” but that its “Board and management are confident that eliminating the dividend on the existing GM common stock and distributing the proposed new dividend security creates an unacceptable level of risk and would not serve the best interests of GM shareholders.”
Greenlight To Push Ahead Regardless
Despite the rejection by GM’s board and management, Greenlight Capital still intends to submit the proposal for a vote at GM’s 2017 annual meeting of shareholders. In addition, the investment firm, which was co-founded by well-known Wall Street investor David Einhorn, has nominated a slate of four candidates for election to GM’s Board of Directors. Greenlight’s fund holds just over 3 percent of GM common stock.
This is not the first time that GM had to deal with activist investors. Just two years ago, GM faced down investor and former Obama automotive task force member Harry Wilson, who wanted a seat on the automaker’s board of directors and was pushing for GM to buy back $8 billion in its own stock. GM agreed to buy back $5 billion in stock, thereby establishing an official capital allocation framework, and Wilson agreed to withdraw his nomination to GM’s board.
Specifically, GM believes that the risks associated with Greenlight’s proposal include:
- The loss of GM’s investment grade credit rating
- Unknown and uncertain market demand and liquidity for the proposed securities, resulting in depressed pricing and selling pressure
- Unproven and entirely speculative valuation impact, and
- Material governance challenges arising from two classes of stock with divergent objectives
Continuing With Established Strategy
Reflecting on the proposal, GM Chairman and CEO Mary Barra reiterated the automaker’s strategy to deliver record financial performance and capital return to shareholders.
“GM’s Board and management are fundamentally transforming our company by executing a plan that is delivering record financial and operating results and returning significant capital to our shareholders,” said Mary Barra, GM chairman and CEO. “For seven months, we’ve extensively reviewed the proposed dual-class structure, as well as other capital allocation strategies, and concluded that continuing to execute our strategy and adhering to our current disciplined capital allocation framework is the best path to deliver increased value.
“Our Board and management remain laser focused on advancing our progress and creating value for our owners by enhancing our portfolio and our operations, leading the future of personal mobility and driving strong performance. In contrast, the proposed structure creates an unacceptable level of risk for our company and its shareholders,” concluded Barra.
Greenlight Proposal Would Not Create Value
General Motors has stated that Greenlight has acknowledged that its proposed dual-class common stock structure would have no positive effect on GM’s underlying business or cash flows, and therefore would not create additional intrinsic value. As such, the proposed dividend security would not help GM sell more cars, drive higher profitability, or generate greater cash flow — nor would it address the fundamental sector factors affecting GM’s stock price.
What’s more, GM believes that implementing the proposed dual-class structure would lead to a loss of the company’s investment grade credit rating. A non-investment grade rating would have an approximately $1 billion EBT impact on GM Financial, put $1 billion of profit at risk for the automotive company and necessitate approximately an additional $5-$10 billion of cash on the GM balance sheet.
Losing the investment-grade rating would also limit the financial flexibility of the company and adversely affect its risk profile, including GM’s ability to execute its strategy with its captive finance arm, GM Financial, access capital markets efficiently, and execute revolver renewals.
Furthermore, eliminating the dividend on GM’s existing common stock “would likely lead to selling pressure by a significant universe of institutional owners and cause concern and confusion among retail holders, resulting in downward pressure on its share price.”
The other side of the same coin also carries risks, as “distributing a large volume of an unprecedented security that has no established market depth or liquidity would likely also lead to selling pressure on the proposed dividend security”, which will likely result in depressed pricing for the new security.
Furthermore, GM believes that the proposed structure could create complex governance challenges, requiring the Board and management to consider and respond to divergent expectations and interests of owners of two distinct classes of stock in GM’s strategic and capital allocation decision making.
GM Recommends Electing Its Strong Slate of Directors
Together with Greenlight’s dual-class common stock proposal, the company also received notice of Greenlight’s intent to nominate a slate of four candidates for election to GM’s Board.
The automaker states that it has a highly-experienced Board with relevant expertise and capabilities in key areas that align with the company’s strategic direction. Having evaluated Greenlight’s nominees, including the connection between Greenlight’s nominations and its dual-class stock proposal, the Board — on the recommendation of its Governance and Corporate Responsibility Committee — has unanimously determined not to recommend any of Greenlight’s nominees for election to the Board.
The Committee’s and Board’s assessment of the nominees’ skills and qualifications followed the process and took into account the considerations described in the “Director Nomination Process” section of the Company’s most recent proxy statement.